We had, way back in Nov 2012, alerted you about the need to get EUINs (Employee Unique Identification Numbers) for all sales staff (Click Here). A lot has happened since then on this subject, including an extension of the deadline until 1st June 2013. So, why are we talking about it now? Quite simply because there seems to be a lot of ground yet to be covered by the distribution fraternity, before the 1st June 2013 deadline, to ensure that each ARN holder and all its sales staff are indeed EUIN compliant. As V. Ramesh, Dy CEO, AMFI puts it, "So far, only about 50,000 EUINs have been issued - and this includes over 20,000 issued to individual IFAs. The total number of employees of the entire distribution fraternity across India who are currently holding EUINs is less than 30,000 today. It is reasonable to estimate that if every single employee of every ARN holder - from a large bank to an IFA - who sells mutual funds to investors, were to have taken their EUINs, we would easily have issued more than 200,000 EUINs by now."
Let's step back and understand what needs to be done and then go on to why this needs to be done.
What needs to be done?
Every individual who sells mutual funds to investors will need to obtain their EUIN before the due date - before 1st June. -
Individual IFAs whose ARN has been registered in their personal names, have been allotted EUINs by AMFI. If you haven't received it yet, please liaise with the AMFI unit at CAMS and ensure you are allotted your personal EUIN
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IFAs who have registered their ARNs in the name of a proprietary firm, would not have automatically got their EUIN allotted. They will need to apply for their individual EUINs, even if they do not have any other sales staff in their firm. In other words, every individual - whether holding an ARN in personal capacity or holding ARN in a proprietary firm or an employee of an entity that holds an ARN - will need to get their individual EUINs before 1st June 2013.
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The process of obtaining EUINs is quite similar to the erstwhile process of obtaining ARNs for employees of corporate ARN holders. You will need to liaise with the AMFI unit at CAMS to procure the necessary EUINs.
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Every ARN holder who employs sales staff to sell mutual funds, will need to ensure that each sales person obtains his/her EUIN before the deadline. Firms can make a distinction between sales staff and service staff. All staff members who sell or otherwise influence investors to buy mutual funds, must have their own EUINs. It is reasonable to assume that service staff - who do not sell, but only offer service related to mutual funds or other products - need not procure EUINs.
Why should this be done?
Effective 1st June 2013, every MF application will carry the EUIN of the individual who has sold the fund to the investor. If the EUIN is not entered in the application form, the investor will have to sign off separately in a portion of the form where he/she declares that he/she is aware that no sales person has been involved in this transaction. By signing this section of the form, the investor is explicitly acknowledging that no sales person gave any advice/guidance/information and that the decision on the investment was therefore effectively taken by the investor himself. This will therefore automatically disable him from making any allegations against any salesperson for mis-selling.
An application form without EUIN and without an investor signoff as given above, will still be processed. The ARN holder will be intimated about this "irregular" transaction, and will be given a 90 day remediation period within which the transaction has to be "regularised" - either by providing the EUIN or getting the client's "execution only" sign off. If within this 90 day period, the transaction is not regularised, commissions on the transaction will not be paid at all.
Why is EUIN so important?
EUIN is an attempt to pinpoint sales responsibility to individuals within a distribution firm. This is the starting point to make all salespersons responsible for their actions, especially when it comes to investors complaining about being mis-sold a mutual fund product.
As all of us are aware, SEBI has recently made mis-selling a fraudulent practice - which, if proved, will invite fairly serious consequences that could include debarring the individual from selling mutual fund products. If a client complains about being mis-sold to, the records will now clearly demonstrate who sold the product to the client and it would be that EUIN holder who will have to answer these charges.
It is for this reason that it becomes imperative for every individual who sells mutual funds to get his/her own EUIN and to ensure that only transactions where they are directly involved in, carry their EUINs. It would be rather unfortunate if one individual's EUIN is used for all transactions done in a branch of a distribution house, even though that individual was directly involved only in a small percentage of the branch's transactions. Individuals who choose to "lend" their EUIN number would be taking a huge personal risk, which could prove to be quite unwise as they would effectively become responsible for all the risks associated with their colleagues' transactions.
Can some distributors indiscriminately misuse the client sign-off provision?
A natural question, whenever an exception to the rule is provided for, is to worry about the potential misuse of the exception by a small section of the fraternity. Can some distributors, who do not want to append their EUINs and therefore take responsibility of the sale, ask their clients to sign on one additional place in the form, and expect that clients will do so without reading the details, like they do for the rest of the form? Quite possible.
For this misuse to be curbed, one would really like investors to read before they sign - but that may still remain wishful thinking, for some time at least. This issue could well be one of the key aspects that the new distribution SRO may need to think through a little deeper. What kinds of checks and balances can be created in the system to dissuade wilful misuse of this exception? What kind of incremental awareness needs to be created so that clients know what they are signing off on?
Is this "sign off" linked to "execution only" transaction under the due diligence guidelines?
It appears that at least for now, there is no effort to link EUIN waiver sign offs as discussed above with the records under the due diligence guidelines, where the larger distributors covered under due diligence are required to segregate clients into advisory vs transaction execution. Is it possible that an advisory client as declared under the due diligence guidelines can waive the EUIN for a transaction and sign the waiver in the application form? Well, as of now, it appears that this is possible. However, as the new system settles down, more checks and balances will surely be put in place to help deter misuse.
What about online transactions through a distributor?
Online transactions through distributor websites will also be covered under these new requirements. Distributors with online propositions will have to quickly work out how they intend complying with these provisions. Will they have one more click through where the client clicks on the EUIN waiver? Will they attempt to tag RMs to individual clients and auto-populate EUINs of these RMs in the application feeds? There is just about a month left for these decisions to be taken and for software to be appropriately amended.
What about direct transactions?
The SEBI guidelines relating to EUIN cover only transactions done through distributors. Direct transactions are therefore exempt from the provisions of EUIN. While this may appear fine for direct online transactions, the industry will perhaps need to think through separately how it wishes to tackle direct walk in clients, who interact with branch staff, and who may occasionally seek guidance / advice from the AMC front office staff.
One would assume that in due course, a separate set of guidelines will need to be framed to cover instances where investors seek "guidance" from AMC branch staff before investing. If some of these instances result in AMC branch staff "suggesting" funds that may not be suitable to the investor's circumstances, how will such investors be protected? Should there be an equivalent of EUIN to deal with offline direct transactions that get executed at AMC branches?
What is mis-selling?
As we had stated in our article back in Nov 2012 (Click Here), the crux of the issue really is to clearly articulate what constitutes mis-selling and what does not. We don't yet have a prescribed sales process (which we had suggested in our earlier article in Nov 2012) - perhaps we will have to wait until the SRO gets formed, for us to have a defined minimum acceptable sales process that will need to be followed for any sale to be deemed as a "good sale". There is meanwhile, considerable anxiety within the distribution fraternity on what will constitute mis-selling and what is the extent of liability that distributors are undertaking in this business. Some distributors have been suggesting that this business may actually become unviable, as you never know when you will be hit with a mis-selling claim and what will be its consequences. The biggest worry seems to be whether clients can claim mis-selling if their investments depreciate in value.
While we will have to await some sales process guidelines, it would be prudent to believe that what works for other parts of the world, will perhaps work in our country as well, in terms of defining what a distributor's sales responsibilities are and in terms of limiting what he is responsible for. It is my understanding that no distributor can be held liable for market performance or for fund performance - both of which are beyond his control. What he can be held responsible for is mis-communicating product features, leading an investor to believe a product has lower risk of volatility than it actually has and advising an investor to buy a fund that he should have known is unsuitable to the investor's circumstances. It therefore is, for example, not about whether a client lost money in an equity fund. Its about whether the client knew that he is buying an equity fund, whose value can go up or down significantly. Its for example about misleading a client to believe that a closed ended fund will indeed provide liquidity akin to an open ended fund. As long as a distributor has explained clearly the product features and established who typically such products are suitable for and who they are not suitable for, he can well claim to have done his job adequately. Performance of the product and the markets subsequently are not what he takes responsibility for.
How can you create simple processes in your office to ensure that you safeguard your firm against mis-selling claims? We have a few thoughts on this, and will be sharing these shortly in a subsequent article.
What do you need to do now?
For now, here's what you need to do now - well before the 1st June 2013 deadline :
- If you are an IFA whose ARN is in the name of a proprietary firm and have not yet applied for your personal EUIN, please do so now
- If you have an ARN under a partnership firm or a corporate structure, and have not yet procured your personal EUIN, please do so now
- If you are an ARN holder and have employed staff to sell mutual funds, please ensure that each sales person applies for his EUIN now
- If you are an employee in any distribution house or bank who sells mutual funds, and have not yet applied for your personal EUIN, please do so now, in consultation with your product teams
There is just a month left - and if Mr. V. Ramesh's assessment is correct, there are still over 150,000 individuals across the country who will need to obtain their EUINs within the next 30 days. That's quite a tall order - there's no time to waste. Please act now.
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