Capital markets watchdog Securities and Exchange Board of India on Tuesday came down heavily on mutual fund players over higher agency commissions they charge from customers, warning that if they don't behave, nothing stops it from taking punitive and corrective actions.
Noting that the domestic mutual fund distributors get one of the highest upfront fees in the world, Sebi chairman U K Sinha on Tuesday asked the industry to keep such fees within ‘manageable limits’ and behave in a self-disciplined manner lest they attract regulatory action.
Stating that the Sebi does not like to get into capping distributors' commission, he, however, said Sebi expects the industry body Amfi to introduce self-discipline for the industry, failing which there would be corrective action.
To buttress his point, Sinha reeled out numbers and said between FY14 and FY15, the revenue from MF distribution just doubled from Rs 2,500 crore (Rs 25 billion) in 2013-14 and crossed Rs 5,000 crore (Rs 50 billion) in 2014-15, while the industry growth has been not so robust.
"Sebi would not like to get into this area (commissions) at this stage," Sinha told reporters here on the sidelines of a CII-organised Mutual Fund Summit.
"We would like to believe that Amfi in their wisdom will be able to introduce some amount of self discipline.
“However, if we find that this not going to be the case, nothing stops Sebi from taking action," Sinha warned.
Sebi has time and again voiced its concerns over higher fees being doled out to mutual fund agents.
A cap on agent commissions would help ensure a level playing field and curb instances of exorbitant payments.
The industry body Amfi had earlier this year announced that upfront commissions paid to distributors would be capped at 1 per cent from April.
Noting that the issue of higher commission is a matter of serious concern, Sinha said "not only Sebi but the whole government is worried about this and we have already set up a high powered committee to look into the type of cost and fees that are being charged to MF investors.
“So this is not an issue which an AMC can wish away."
"So I made it very clear to the fund houses that they should read the writing on the wall and introduce some self-discipline," he said.
The chairman also said that the regulator is committed to setting up a self-regulatory authority to regulate MF distributors and will go ahead with the process once certain legal hurdles are cleared.
"Unfortunately, the SRO matter has gone to the judicial authorities. The matter has to be resolved by the judiciary only then can we move forward. We had not anticipated this," Sinha said.
"But as soon as this problem is resolved legally, the Sebi thinking is clear and that we would like to have a very strong SRO for regulating the mutual fund distribution industry," Sinha noted.
Further, he observed that the advisory services in the MF industry has to be separated from the distribution services to ensure consumer protection.
"I am sure the practice in the market is that people are still advising and also distributing and I have asked my team to look into it because this a practice we don't endorse," Sinha said.
Giving the example of e-commerce, Sinha said there is some disconnect for customers when it comes to buying financial products, more so because distributors in the financial sector, especially MF, distribution are not offering digital options.
He observed that the banking sector has overtaken the securities markets in terms of electronic transaction with 30 per cent of all banking transactions being done electronically, which in terms of value is 3.2 per cent of the total.
But when it comes to the MF sector, Sinha noted that this is just 1.3 per cent in terms of value while about Rs 133 crore (Rs 1.33 billion) worth of money is being transacted through mobile phones.
A lot of ground can be covered, Sinha noted.
Calling for separation of advisory and distribution services, Sinha said the same person doing both the job is worry all over the world and expressed the hope that this will not last long.
Sinha said a meagre 295 agencies are registered for advisory services as on May 31 this year.
"We are finding that there are agencies, especially in small towns, which are distributing products as well as advising. But this is not acceptable to Sebi in the long-run.
"We will wait for some more time but we want such entities to know that we are watching them.
“If we see things are not improving then we would have to take some measures," he said.
Sinha urged the industry to make transformational changes if it wants to grow.
"If we look at the customer experience from mutual funds in the latest McKinsey report, only 7 per cent is positive.
“This shows early signs of weakness in the industry and if this is not addressed, the optimism will be short-lived," Sinha said.
Illustration: Uttam Ghosh/Rediff.com