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Sumit Bose report: the whole basis is flawed

Roopa Venkatakrishnan, Director, FIFA

14th October 2015

In a nutshell

FIFA has put together, in consultation with other members of the United Front, a very comprehensive response to SEBI on the Sumit Bose committee's report. FIFA's position is that the whole basis of the report is flawed as its approach towards distributor incentives is hopelessly uni-dimensional, in that it looks at the issue only from the angle of mis-selling.

Beyond responding to specific recommendations, FIFA has used this opportunity to take up a broader issue: of trying to get stakeholder consensus first on the principles and a broad framework that should govern intermediary incentives. It is because we don't have a commonly agreed framework, that we have seen numerous ad-hoc measures at different stages, to the detriment of growth of the intermediation business

Roopa asks every IFA and all industry stakeholders to do their bit, in their own way, to drive a consensus on the framework that FIFA has proposed.



As we all know, the contents of the Sumit Bose committee's report have been a subject of much discussion and debate within our industry. FIFA put together a comprehensive response, took into confidence other IFA associations that are part of our United Front, and presented a joint response to SEBI.

The purpose of my writing this piece on Wealth Forum is to bring to the attention of all IFAs across the country, not just the details of our response, but also to try and get each one of us on the same page on the whole issue of how distributor incentives ought to be decided.

We haven't just restricted ourselves to giving responses to specific recommendations. We have taken this opportunity to table with SEBI our firm belief that the basis of this committee's efforts and similar efforts in recent years is deeply flawed. Unless we manage to first get all stakeholders to understand and agree the broad principles that should drive intermediary incentives, we will forever be fighting with our backs to the wall. This response to SEBI is our humble attempt at moving the goal post to where it ought to be.

My sincere request to all stakeholders in the industry is to focus regulatory attention on first discussing and agreeing the principles and a framework, and then look at regulations within this framework.

Links are provided at the end of this article for you to download our complete response and its annexures. Here are the salient points, to enable you to get a quick read.

  1. This response is on behalf of United Forum - a common platform of leading IFA associations across the country

  2. Committee should have had consultations with representatives of IFAs,, to understand their perspective

  3. Distribution has three main channels: banks, brokers and IFAs, each with their own distinctive model. Its fundamentally wrong to club all into one bracket and attempt regulations on a "one-size-fits-all" basis

  4. Industry should first articulate its goals, and incentive structures should be aligned to these goals. Goals have to recognize customer centricity as well as growth and development of the industry to reach larger number of investors. Incentive structures should align with both goals.

  5. Framework for distributor rating has been suggested, which seeks to measure distributor performance on best practices that are aligned with industry goals. Parameters such as net sales, new client acquisition and longevity of assets should be recognized in arriving at distributor ratings.

  6. Distributors with higher ratings (those who are positively contributing to industry growth) should receive proportionately higher incentives

  7. Committee seems to have adopted a "Seller Beware" approach, which is the other end of the spectrum as compared to a "Buyer Beware" approach. The need is for a more balanced rather than an extreme approach

  8. Policy framework for distributor incentives cannot be uni-dimensional and focus only on mis-selling. The fact that intermediary numbers have dwindled over the years needs to be recognized, the causes for this need to be understood and measures to enhance growth of intermediaries need to be adopted, to enable meaningful retail penetration of mutual funds.

  9. There is little or no evidence of mis-selling (only 19 distributors have been suspended out of over 1 lakh and only 12 have been terminated). The basis on which mis-selling has become the central focus of the committee's approach is therefore not clear.

  10. The overwhelming majority of IFAs are focused on providing appropriate solutions to their investors, as they fully understand that their business is inextricably dependent on client satisfaction. Makngmis-selling as the central focus for developing incentive structures therefore misses the whole point.

  11. "Evidence" presented by the committee relates to a period before several remedial measures have already been taken by the industry, including ban on entry loads, introduction of direct channel, restriction on upfront commissions to 1%, commission clawback and agent-advisor differentiation. There is no evidence presented that suggests that mis-selling continues to be a serious issue even after all these measures have been implemented.

  12. Instead of banning upfront commissions, focus should be on encouraging right selling

  13. Give investors a choice between a high upfront and low recurring cost model vs a lw upfront and higher recurring cost model

  14. Incentives for right selling are more important than penalties for mis-selling

  15. It is inappropriate for the committee to suggest that the regulator should push any one product category, like they have done, when asking for the regulator to promote ETFs

  16. Free look period in mutual funds is impractical and unwarranted. Who will bear the market risk during the free look period? And, will you not be prompting investors to cancel transactions, should the market turn down immediately after their purchase?

  17. The regulator should prescribe overall TER, which should not include any taxes levied by the Government. All such taxes, including service tax, must be charged over and above the TER and should automatically pass through to the consumer

  18. Removing upfront commissions will mean huge entry barriers for any new IFA, which will be very detrimental to the growth of the industry and its ability to serve larger number of investors

  19. B-15 incentive should remain - it is a necessary input for realisation of the financial inclusion goals of this Government

  20. Reducing trail / stopping trail after certain number of years is a flawed idea. The distributor is paid trail to continue servicing existing investments. During high volatility periods, investors require hand-holding, irrespective of whether their current holdings are 1 year old or 10 years old. Stopping/reducing trail can potentially increase churn, which is anti-investor.

  21. There is no need for regulatory intervention to lower TERs. Market forces have already done this in debt funds, which are being run on TERs significantly below the regulatory limits. Allow market forces to do likewise in equity funds.

  22. One page Distributor-Investor form is impractical as many of the details required may not be available with the distributor at the point of sale. This will only serve to increase paper-work, in an environment where all are focused on reducing paperwork and increasing convenience.

  23. If upfront commissions are recognized as necessary in selling pure risk products due to the difficulty of the sale, why should the same principle not be applied for example in selling long term retirement solutions that are market-linked? Are these very easy to sell?

  24. Just as we have regular plans and direct plans, the industry must introduce an advisor plan, with a lower cost than the regular plan, which can be offered by RIAs to their clients.

To conclude

To conclude, I would like to reiterate one point: it is up to all of us to make a focused effort in getting regulators, the Government and all stakeholders who influence the rules of our business, to first understand and agree a framework and broad principles that ought to drive regulations on intermediary incentives. Each one of us has a role to play in our own limited way, to get this recognition within the system. It is only then that we can look forward to balanced regulations that are truly win-win for all stakeholders. I am counting on the support of each one of you to influence this change, in your own way.

Click here to download FIFA's official response to the report

Click here to download Annexure A

Click here to download annexure "Profile of IFA"

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