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Finally, a truly united response to SEBI on commission disclosure

Dhruv Mehta, Chairman, FIFA

14th May 2016

The United Forum - which comprises 32 IFA associations along with FIAI - which represents the interests of national distributors and banks - together submitted a comprehensive, well researched and well articulated response to AMFI on SEBI's circular on commission disclosures.

Dhruv shares three important perspectives which form the core of the differences of opinion between the regulator and distributors, and urges for the regulator to adopt a more holistic and balanced approach.

All eyes are now on AMFI on how it takes forward the united representation of the entire distribution fraternity.


On 12th May 2016, the United Forum (which consists of 32 IFA associations from across the country) together with FIAI, the body that represents the interests of national distributors and banks, submitted a joint response to AMFI on SEBI's recent circular on commission disclosure.

To view the complete response, Click Here

This marks a significant step forward for the distribution community, as it is perhaps for the first time that the entire distribution community, across channels and across geography, has come together with a single voice to table our concerns on the recent circular.

I would urge you to go through the response in detail and familiarize yourselves with the perspectives and insights that have been shared in it. It is important that we continue maintaining one voice, in all our engagements at various levels on this issue. I know that a lot of efforts are being made to engage different stakeholders - I will sincerely request you, when engaging with various stakeholders, to maintain the same messages that all our associations have jointly signed off on.

Our expectation is that AMFI will now either make a representation to SEBI, sharing our concerns and perspectives, or will invite us to make a joint representation to them.

3 important perspectives

There are 3 points I want to discuss here, which I think are the core issues where we seem to have differences with the regulator's point of view. It is important for all of us to share our perspectives on these 3 points, to enable our regulator to understand the rationale behind our objections.

1. Investor's right to information

The argument in favour of enhanced commission disclosure is that it in in the interests of investors and anything that is in their interest, must be supported and should not be opposed. As investor-centric distributors, we fully support any move that provides quality information that enables investors to take well informed investment decisions. IF CAS statements start disclosing portfolio performance, return analysis etc like we do in the consolidated statements we send to our clients, that would be great. But, disclosing how much was the absolute amount of commission a distributor received in the last 6 months on an investment, and how much was the annual salary of the CEO, fund manager and sales head of the company that is managing this fund - does not in any way enable an investor to make better quality investment decisions.

Let us understand the legal position very clearly. SEBI has permitted two forms of intermediation: distribution and RIA. In the RIA framework, an advisor signs a contract with the investor to provide services for a fee and the fee is agreed between both parties. In the distribution framework, a distributor signs an agreement with a fund house to distribute their products for an agreed commission, which is capped by an AMFI best practice circular. Further, distribution and all other costs incurred in the fund management business are anyway subject to overall cost caps on the TER which are regulated.

An investor has a right to know how much he is being charged for the fund he wishes to purchase or has purchased. Currently there is complete transparency on this as the TER which reflects the total cost that the Fund charges is known/disclosed. But within the total cost, how the fund house is managing its various cost elements, is not going to help the investor in any way or enable a more informed decision especially when there is a regulatory ceiling on total expense that can be charged.

There are many moving parts which in totality serve the investor. A distributor provides product suitability related guidance and ongoing service, an R&T agent provides timely and accurate account information and executes transactions, a television ad from the fund house may leave a favourable impression in the investor's mind, a fund manager works to outperform the benchmark set for the fund - and so on. Are we saying that an investor has a right to know how much a fund house paid for a TV commercial? Or how much it is paying its R&T agent? Are we saying that all this information enables her to make better investment decisions?

Right to information is not a holy cow, and cannot be bandied to justify all actions. When privity of contract is sought to be compromised, there need to be compelling reasons - and these compelling reasons need to be debated in the public forum, especially with the people who will be impacted. That is a basic tenet of democracy.

2. Need for a Consultative Process

We keep talking of an investor's right to information. What about a distributor's right to information? When rules and regulations are brought that make fundamental changes in his business, doesn't he have a right to know why?

SEBI is a member of IOSCO, the global body of financial market regulators. The International Organization of Securities Commission's Objectives and Principles of Securities Regulation ("Principles") - Principle 4 states as follows:

"Principle 4: The Regulator should adopt clear and consistent regulatory processes

It further elaborates :

In the formulation of policy, the regulator should:

  1. have a process for consulting with the public including those who may be affected by the policy;

  2. publicly disclose its policies in important operational areas;32

  3. observe standards of procedural fairness;

  4. have regard to the cost of compliance with the regulation."

We would urge SEBI, which is a member of IOSCO, to follow these guidelines in letter and spirit. If SEBI believed that more commission disclosures are required than what has already been in force since 2009, on what basis did it come to this conclusion? Why did SEBI not consult a single distributor association before coming to the conclusion that this regulation is necessary? Which investor associations did it consult with and what was their feedback? What was AMFI's feedback when it was briefed about this impending regulation? On what grounds did SEBI think that AMFI's arguments did not hold merit?

Did SEBI perform an impact analysis of enhanced disclosure? Did it consider how rampant it will make passbacks? Did it consider how passbacks and not advice may influence investor decisions? Did it consider how many distributors may be squeezed out of business and how fund houses aim to continue serving existing investors and reaching out to new investors with a significantly depleted distribution force?

Taking another example of impact analysis, when commission caps came into force last year, the focal point was high upfronts in closed ended funds. Now, the total AuM of closed ended funds is less than Rs. 20,000 crores out of an equity fund AuM of around Rs. 400,000 crores. Was an impact analysis done to justify commission caps across the board?

This is not an effort at pointing fingers - nothing constructive comes out of such an exercise. But we need to understand that just as we love quoting what's happening around the world to justify regulatory actions here, shouldn't we also consider how regulators around the world decide and implement new regulations, and take some useful lessons from them on adopting a more consultative approach?

3. Global context is deeply flawed

On the subject of the global context that is sought to justify our regulations, there are a couple of basic points that we need to keep in mind. First is that disclosure of total costs in markets like US, Canada, UK etc assumes high importance as their costs are not regulated. There is no cap on how much TER a fund can charge. Hence disclosure is very important. In India, TER is and has always been capped by regulation. Now, even distributor commissions are capped due to the regulator's intervention. When we equate our disclosure needs with theirs, we are comparing apples and oranges!

Second aspect of the global context is the notion that costs in India of mutual funds are way above international standards. There are Morningstar reports that talk about how India and Canada have the highest TERs among most countries that have vibrant mutual fund industries. It is this notion that is making SEBI push for more and more disclosure - of fund house salaries, of distribution commissions - in an effort that disclosure will make market forces drive down these costs.

The basic flaw in this is that markets like US (which comes in at No.1 in this Morningstar report) follows a practice of unbundling costs while India and Canada (which come in at the bottom) follow a bundled cost approach. The TER in India contains everything that an investor pays - there is no separate charge he pays to a distributor/advisor or to a platform provider. When you bundle in all the costs that a US investor actually pays, it comes to around the same amount that an Indian investor pays in the bundled format. Again here, we are comparing apples and oranges and coming to incorrect conclusions.

To conclude

I will conclude with two thoughts:

  1. The Modi Government is trying to differentiate itself on the plank of transparency, and this was visible in the way they handled the coal and telecom auctions. It would be really nice if SEBI, as an extended arm of the Government, adopt the same principle of transparency in its decision making.

  2. We, as FIFA and as United Forum, remain eager and committed to engage with SEBI meaningfully and constructively. We have the interests of our investors very clearly in our hearts, as without our investors, we don't have a business. We would really appreciate if SEBI decides to adopt a more consultative approach, be open to views and counter views from all stakeholders, put all the debates in the public domain and then take well balanced decisions after a due consultative approach. What that will do is to ensure that it takes every stakeholder with it, working jointly to serve investors better.

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