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An important aspect of SEBI's recent MF reforms measures is its effort to curb mis-selling. The resolve to fight mis-selling is clear from the manner in which SEBI has decided to go about laying down the groundwork - it has mandated that every individual involved in selling mutual funds will be given a unique ID and this ID will be entered in each MF application form. This will help identify exactly who sold the product in the first place to the investor. This will provide a system to pin-point responsibility for mis-selling to the specific sales person involved, based on investor complaints received.
Commissions could be withheld on applications without valid EUINs
Going forward, every ARN holder - from the biggest bank to the smallest IFA - will need to ensure that every client facing staff member (a person who sells / advices on MFs) has received the EUIN - Employee Unique Identification Number - from AMFI. The process of insisting on EUINs to be entered in all MF application forms is likely to be enforced from Jan 2013. Applications without a valid EUIN will be processed, however, commissions are likely to be withheld in such cases.
EUIN issuing process has commenced
AMFI has begun the process of implementing this new regulation. Over 6000 corporate ARN holders have already received communications from AMFI advising them to update their employee ARN records with AMFI, to enable it to issue EUINs to all employees with valid ARNs. Employees of corporate distributors who may have taken the NISM MFD exams but not bothered to register with AMFI, must do so right away - to ensure that they get their EUINs before Jan 2013. Employees who have neither registered with AMFI not taken the MFD exams need to do both fairly quickly, if they don't want to be on the wrong side of the law. Employees whose ARN has not been renewed, need to do so right away, as EUINs will be issued only to employees with a valid ARN registration.
There are over 800 corporate ARN holders who have not yet registered even a single employee with AMFI. These are the distributors who will come under immediate scrutiny as questions will undoubtedly be asked about how they are managing to sell mutual funds without any AMFI registered salesperson.
AMFI will now begin the process of writing to the 40,000 + non-corporate ARN holders, appraising them of the EUIN requirements and advising them to ensure that all their customer facing staff take the MFD exams and seek AMFI registration immediately.
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"EUIN lending" practices may see resistance from employees
Some distributors with many client facing employees may be tempted to get just one or two EUINs, in order to save the cost of AMFI registration for all employees and insert that number for all transactions done through their ARN code. This may however not be so simple, going forward. SEBI's intention of getting EUINs is to pin-point accountability for every sale. SEBI has made it very clear that it will treat mis-selling as a fraud, which will come with its share of stringent action. In these circumstances, it would be only a very brave person who will lend his EUIN for transactions done by other team members, in which he has no connection at all - as he will be the fall guy, should there be a complaint from an investor about mis-selling.
It would therefore be prudent for all distributors - big and small - to ensure that they get all client facing staff to pass the MFD exams and seek registration with AMFI without any further delay. Once they seek AMFI registration for their employees, AMFI will issue EUINs for all such valid applications.
EUIN database needs to be updated for employment changes
An important feature of EUINs is that AMFI will be sending out individual ID cards for each such employee. When an employee moves from one firm to another, it will become the responsibility of the new firm and/or the employee to advice AMFI about the change in employment. What happens if they fail to do so? The current thinking seems to be that if an application form from ARN holder Y comes in with an EUIN number that was allotted to an employee of ARN holder X, the transaction will be treated as abnormal and commissions could be withheld. The objective clearly is to find ways in which AMFI can ensure that the EUIN database is always kept current - which is a pre-requisite for this regulation to be effectively implemented.
EUIN can be a base for multi-level accreditation systems
Thinking ahead, EUIN can be the base on which multiple level certifications can be built. Once you have an EUIN system in place, it becomes a lot simpler for NISM to roll out certification courses at various levels and for AMFI / the new SRO to record individual certification levels achieved by each salesperson. This in turn can be the foundation for segregating product categories that can be sold by people with specific accreditation. The EUIN can thus be leveraged for a lot more than mis-selling related issues.
The bigger issue : how do you define mis-selling?
Ensuring that all salespersons are EUIN compliant is only the first part. The bigger issue which still needs a lot more attention and clarity is how will mis-selling be determined? What constitutes mis-selling? What processes does a distributor need to comply with to ensure that he does not fall afoul of the mis-selling regulations? If an investor loses money on a transaction and files a complaint about mis-selling, how will this complaint be dealt with? What documentary evidence will be required to establish that the distributor had sold the product having due regard to the suitability of the product for that investor? Will this mean that risk profiling will effectively become mandatory for all intermediaries to conduct - whether they call themselves distributors or advisors? To what extent can the proposed product labels simplify this whole issue?
Sales process needs to be defined by SRO
There are many questions that need to get addressed in the coming months. There are sales process guidelines which will need to be framed and published by AMFI or the new SRO for distributors. Without these guidelines in place, you can't really hold a distributor liable for mis-selling - you need to first guide about how to sell, in order to haul up anybody for mis-selling.
These processes will come in due course. For distributors, this will add another set of responsibilities to discharge. Compliance has increasingly become one of the biggest issues for distributors in the developed world - we are now entering an era where it will come into sharper focus in our market as well.
Make your firm EUIN compliant - NOW
To the extent the new guidelines deter the few black sheep from mis-selling and thus make the MF buying experience safer for the investor, it will be worth the effort. The challenge is to find a way in which investors are given the much needed protection from mis-selling, without adding too much bureaucracy that deters selling of mutual funds. While this debate can go on for a while longer, the immediate call to action for all distributors is to become EUIN compliant NOW !
Do you have any questions or queries on the roll out of the EUIN process? Do you have any doubts that you want cleared? Any suggestions on the EUIN process? Any inputs on how to define a simple sales process that can be the benchmark for determining mis-selling cases? Share your thoughts and views with the industry by posting your comments in the box below - its YOUR forum !
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