Amfi to seek Sebi help on enforcing commission norm

Move comes after growing concerns over fund houses flouting guidelines capping upfront commission at 100 bps

The Association of Mutual Funds in India (Amfi) plans to approach market regulator Securities and Exchange Board of India (Sebi) to seek guidance on ensuring all fund houses comply with Amfi's 100-basis-point cap on upfront commission. The decision was taken at an Amfi meeting on Friday.

While four to five asset management companies (AMCs) have defied the cap guidelines openly, several are flouting the same covertly, said sector officials. According to sources, a large Indian fund house had recently sent out a mail to Amfi, bringing the issue into focus. This was followed by a separate letter by seven fund houses to Amfi asking it to examine the issue.

"The brazen flouting of guidelines is putting pressure on AMCs that are sticking to the cap, as distributors tend to gravitate towards funds that pay more," said the chief executive officer (CEO) of a fund house, on the condition of anonymity. According to another CEO, it makes sense for Amfi to approach Sebi on the matter, since its best practice guidelines were voluntary in nature and cannot be enforced legally. "If the current practice continues, many more AMCs will start going beyond the cap."  

Notably, while the market regulator has voiced its concerns on high commission and the resulting mis-selling of schemes in the past, it had categorically stated that it was not in favour of getting involved in deciding or enforcing any cap on commissions.

Earlier this year, Amfi had sent a proposal to all fund houses to cap the upfront commission at 100 basis points (bps). It had asked AMCs not to upfront the trail commission, as was the case in many of the closed-end equity schemes.

Several smaller fund houses are also miffed that a number of large fund houses had paid extra commissions to distributors ahead of the April 1 deadline. A number of distributors, mainly the larger ones, had reportedly entered into an agreement with fund houses to get advance commissions.  

"Just because 10 per cent of the sector is not following the cap, does not mean that other funds should throw in the towel," said Manoj Nagpal, chief executive, Outlook Asia Capital. "The cap has been beneficial as it has been able to curb the mis-selling of certain categories of schemes, particularly closed-end funds. The number of new fund offerings has also come down significantly after April."

 

While 19 closed-end schemes were launched in the first three months of this year, less than a dozen have hit the market in the next six months.

A total of 54 such schemes were launched in 2014.

Market watchers say inflows into closed-end offerings in 2013 and 2014 were largely driven by high commissions paid to distributors. Fund houses gave upfront commission as high as six to seven per cent for closed-end equity schemes, compared with one to two per cent for open-end ones.

The Sumit Bose committee recently recommended a complete phase-out of any upfront fees for agents, to curb mis-selling of financial products and rationalise distribution incentives. The committee was set up by the finance ministry last year.

CAP AVOIDANCE

• The cap on upfront commission at 100 basis points became applicable since April 1
• While 4 to 5 AMCs have defied the cap openly, several are flouting it covertly
• Smaller AMCs are miffed that large fund houses paid extra commissions to distributors ahead of the April 1 deadline
• While the regulator is concerned about high-commission payout, it is not in favour of deciding a cap
• The Sumit Bose panel recently recommended a phase-out of the upfront fee to curb mis-selling of financial products