Cap on upfront fee: Distributors fume

Many fund houses yet to come on board; threat by agents to stop selling MFs, some to petition CCI as Sebi stays aloof

The 12 lakh crore-domestic mutual fund (MF) sector is in turmoil on the eve of the cap of 100 basis points upfront commission introduced by the Association of Mutual Funds in India (Amfi) kicking in from Wednesday.

The move has divided the sector. One section, largely of big fund houses, agrees with the move, while accepting it could create issues in the near term. Another section, of smaller houses, believe the move could be detrimental to their growth prospects as it will favour the larger players. Several mid-size and small fund houses believe Amfi is trying to play big brother instead of behaving as a body representing the entire sector. And, distributors are staunchly opposed.

Chief executives are feeling the pressure from distributors and peers. “I have been getting SMSes from distributors since five in the morning, with queries about my fund house’s stance. My standard response has been that we still haven't made up our minds,” confesses the a CEO of a fund house.

UNCERTAINTY LOOMS
MFs vs Amfi; MFs vs MFs, MFs vs distributors

• Amfi’s proposal on upfront cap comes into effect from Wednesday
• Upfront capped at 100 bps; doing so for trail disallowed
• Amfi says sensitive issues can never have unanimity
• Sebi stays away from intervention
• Many CEOs say they're stalling
• Distributors threaten not to sell MF products with low commission
• Small MFs contemplate dissociation from Amfi, allege trade body favours large players
• Some contemplate legal action against Amfi if proposal is forced

Amfi says all MFs' upfront commissions to distributors must be less than 100 bps and has also warned against paying trail commission in advance. The board of directors of asset management companies (AMCs) will have to confirm to it that they're complying, certified by auditors.

According to sources, some senior officials are considering resigning from the Amfi committee and even dissociating from it body if the cap on commissions isn’t withdrawn. “The measures taken by Amfi have always favoured the big guys. The industry body isn’t doing much to take care of the small players’ interest,” said the CEO of an AMC, asking not to be named.

Replies H N Sinor, the head of Amfi: “The (cap) proposal will come into effect from April 1. Those who have problems with it are welcome to discuss it with us. There are only four or five fund houses which have reservations; most others have agreed. Sensitive issues will never have unanimity. We have to take the consensus approach. More, all this is subject to review after three months.”

The decision by the markets regulator, Securities and Exchange Board of India (Sebi), to not intervene has added to the uncertainty. “Sebi’s decision to not take a stand has weakened Amfi’s position. Since Amfi is not a self-regulatory organisation, it will be difficult for them to impose 'best practices guidelines',” said a sectoral expert.

Some fund houses, sources said, are even considering legal recourse against Amfi.

Meanwhile, the distributor community has turned up the heat, with many threatening to stop selling MF products. Some large ones are even planning to petition the Competition Commission of India (CCI), contending the move could lead to cartelisation.

Experts say MFs continue to remain 'push products' and, therefore, there's a need to properly incentivise distributors.