A section of mutual fund distributors have written to mutual fund industry body Association of Mutual Funds in India (AMFI) and mutual fund CEOs saying that SEBI failed to conform with international standards before introducing the mandatory disclosure of commissions to investors norm. The Foundation of Independent Financial Advisors, which wrote the letter to AMFI and requested that it be forwarded to SEBI, questioned the regulator’s failure to hold a consultation process with the advisor community before introducing the new rules.
Starting October, an investor will know from his half-yearly consolidated account statement exactly how much commission the fund house paid to his distributor for selling the product. While the investors will benefit from the disclosure, mutual funds and individual distributors have been up in arms about the regulation.
Now, distributors are saying that SEBI failed to comply with the International Organisation of Securities Commissions (IOSCO) principles when it introduced the regulation without consulting them first. IOSCO is a global body of financial market regulators of which SEBI is a member. According to IOSCO’s Objectives and Principles of Securities Regulation, a regulator should adopt “clear and consistent regulatory processes” and must have “a process for consulting with the public including those who may be affected by the policy.”
Independent financial advisors (IFAs) have been nervous about the new disclosure requirements ever since they were announced in March, and have since met with SEBI and the Ministry of Finance to request a rollback of the regulation.
Redemption pressure
An industry official said that IFAs are nervous now because the equity markets tanked all through last year. The S&P BSE Sensex fell over 10 per cent through FY16, and IFAs are worried that “investors will start questioning them or pulling out money once they know how much the advisor has earned through his investment when the performance of a mutual fund investment should be judged from a three-year perspective at least.”
A senior independent financial advisor, on condition of anonymity, said, “Did SEBI conduct an impact analysis on how this disclosure will affect investor behaviour before it introduced this regulation? If it did, why doesn’t it make the results of the survey public?”
Most global markets do not have disclosure of commission amounts in account statements, the advisor added. “The US does not have this practice. Canada has recently introduced this rule after giving three years of notice and having widely circulated the proposal and having considered the feedback received from industry participants.”
A detailed questionnaire based on the IFA’s letter to SEBI was not answered. However, at an exclusive interaction with editors in Mumbai last week, UK Sinha, SEBI Chairman, said, “Obviously, a section of advisors are very unhappy with it but that is a challenge that SEBI as a regulator has to face all the time. We’re doing this because these are recommendations of the report by the Sumit Bose Committee (which was formed under the Ministry of Finance). The data doesn’t indicate that this will affect the industry. The fact remains that product costs are very high and this needs to be contained.”
The report, published last August, recommended making financial products like insurance, pension and mutual funds less expensive for investors and bringing in more transparency in the industry.
Legal actionBusinessLine learnt that some IFAs are also considering legal action against the regulator for creating an unfair playing ground for mutual fund distributors vis-a-vis distributors of other financial products.