The Securities and Exchange Board of India (Sebi) has received a mild response to its proposal to make it mandatory for mutual fund distributors to disclose the commissions they are paid by asset management companies (AMCs).
Sources close to the development said that the market regulator had put up a discussion paper in this regard on its website. The paper also included other points like variable load structure for distributors. Sebi had sought public comments on all these issues between February 13 and March 6.
Though there was a lot of response to the variable load structure proposal, very few responded to the proposed commission disclosure norms.
At present, AMCs pay a commission of anything between 50 basis points and 3.5 per cent to their distributors. This commission is over and above the 2.25 per cent entry load that is paid by investors.
“As distributors' commissions vary according to different schemes and fund houses, investors are often kept in the dark regarding this payment. As a result, it become difficult to ascertain whether the advice a distributor renders is in the genuine interest of the investor, or if it is influenced by the amount of commission he is paid by the AMC,” said the source.
If this particular disclosure norm had been implemented, it could have encouraged other regulators to impose similar guidelines.
The Association of Mutual Funds in India (Amfi), which sets the code of conduct for distributors, is quite positive about the proposal.
“If implemented, this move will bring a paradigm shift for the mutual fund industry. A number of other countries have already adopted it. Once Sebi makes it mandatory, a separate code of conduct will be added for distributors accordingly,” said Amfi Chairman A P Kurian.
However, some of the largest fund houses seemed sceptical about the proposed norm's implementation. Most questioned the practicality of the move. A chief marketing officer of a large fund house maintained that it would be rather difficult to disclose all commissions that distributors get for selling schemes.
“This can be addressed along with the variable load structure as and when investors give their consent for charges they agree to pay to their distributor,” he added.
During new fund offers (NFOs), fund houses tend to pay 2-3.5 per cent higher to distributors for promoting, branding, and boosting sales of the fund on offer. This is done in the hope that the AMC would be able to cover the costs in the long-term as the market appreciates.
Distributors are concerned that such policies may make their businesses unviable. Many feel that distributors would simply prefer to sell insurance products as their commissions are higher.
Most industry players feel that, though such norms create more transparency, the sector needs more time to implement such norms. They also said that there should be a level-playing field between mutual funds and insurance products.
“Distributors' margins may immediately come under pressure if this norm is implemented,” Geojit Financial Services' National Head of Distribution, K Venkitesh, said.
