Ashish & Manish Goel, Vista Wealth, Delhi
See previous articles of this series:
4 devils of distribution business: Click Here
5th devil of distribution business: Click Here
At the outset, we want to make it clear that views expressed in this article are the collective opinion of all DFDA members, of various IFA associations across the country, of various IFA thought leaders and hundreds of IFAs who in their individual capacities keep sharing and exchanging views with us on industry developments.
Towards the end of August 2018, all MFDs got a flurry of mails from AMCs stating that pursuant to SEBI directives, our commissions will be withheld for transactions of clients with incomplete KYC, and that we have to ensure completion of KYC if we want our commissions to be released. This has created a lot of anger and disillusionment among IFAs. The basic question that all IFAs are asking is simple: there are three parties to an incomplete KYC – the investor, the distributor and the AMC – why is only the distributor being penalised?
We were informed that in the course of SEBI’s inspection of AMC books, they found several instances of incomplete KYC and accordingly issued a circular on July 4th to AMCs to complete the KYC process and to also withhold distributor commissions effective from August 2018 (i.e. payments made in September 2018 for August commissions due). The mail that we IFAs received came in the last week of August – effectively giving us 4-5 days to complete KYC on the entire list, or face the prospect of commissions being withheld. Is it humanly possible for any distributor to complete this task in 4 days? By what stretch of imagination does 4 days become a reasonable period for completing this remediation exercise?
We have the following 7 observations to make, which we would like fund houses to consider carefully:
- The inspection was done in AMC books. AMCs are responsible for complying with KYC norms of SEBI. We IFAs are designated as agents of AMCs who are not regulated by SEBI or for that matter by anybody including an SRO that was promised years ago. In such a situation, when KYC is incomplete for certain investors, why is only the distributor being pulled up? Has SEBI asked for AMC management fees to be withheld for these non KYC compliant cases? Have these investor folios been frozen until KYC remediation is done? Why only us?
- At the time when we submitted the transactions to AMCs, they vetted them, they found them in good order and then they executed them. Later on, because KYC rules kept changing, transactions that were valid at the time of execution were deemed to be KYC deficient. How does this become a distributor’s fault? Why should our commissions – which were earned on the basis of a valid transaction executed years ago – now be withheld?
- The regulator keeps reminding us that we distributors do not represent the investor (only RIAs do) and that we merely represent the manufacturer. If that be the case, and since it is the fund house who is ultimately responsible for adherence to KYC, why are AMCs not being penalised and only their agents are – who anyway do not own or represent the investor?
- The basic tenet of KYC is to ensure that the fund house has full knowledge of who is investing and is satisfied that the person is a bonafide investor and not a money launderer or such other person who is misusing the mutual fund system for illegal activities. Incomplete KYC therefore is a potential risk of inappropriate investors misusing the MF system. The logical conclusion should therefore be that if KYC is deficient, the investor’s account is frozen pending completion – so that you don’t allow this “suspect” investor to siphon away the money until you are sure he is not actually a “suspect”. What exactly is achieved by withholding a distributor’s commission? How does that reduce the risk of a “suspect” investor misusing the MF system?
- The fact is that if remediation has to be done because rules changed after the transaction was accepted as valid, it becomes a joint responsibility of all three stakeholders – AMC, distributor and investor – to complete the process. All three have to be given enough time, enough information about the need for doing this and enough notice of penal steps that will be taken if remediation is not completed within a reasonable time given. We see so many mails from fund houses going to investors cross selling all kinds of products and giving them so many different marketing updates – but not a single fund house sent out a communication to these KYC deficient investors explaining the remediation required under SEBI’s directions and urging them to get in touch with their distributors who can facilitate the process for them. Total silence from fund houses – just lists given to us and a 4 day deadline for completion. Can’t fund houses understand such a simple fact – that when a letter goes from the fund house with a deadline and a regulation quoted, it gets the investor to get in touch with us and get things moving quickly, rather than we having to contact each client, explain verbally the remediation requirement and clients not getting the seriousness of the exercise because there is no official communication from anybody about the need for this extra paperwork.
- If KYC is ultimately the AMC’s responsibility, can they really say that they have done their bit on remediation by sending distributors a list, giving a 4 day deadline, withholding commissions and then getting on with all other forms of communications with the same investors?
- We see so often news headlines of RBI imposing penalties on banks for non-compliance with KYC norms. How come SEBI is penalizing only distributors? Incidentally, what happens for KYC incomplete cases under direct plans? Are we saying not a single such instance has occurred? What has SEBI done about that? At least there, have they decided to withhold AMC management fees? Or is nobody responsible because the investor came direct?
Time to take collective ownership – stop passing the parcel
I hope our AMCs (who keep calling us their partners) see the depth of frustration and anger at this gross injustice to distributors. Rather than hiding behind a SEBI decision, why can’t they take joint ownership of this exercise, along with us? Why can’t they send letters, mails and SMS messages? Why can’t they have outbound telecallers getting in touch with these investors, appraising them of the issue and urging them to contact their distributor to complete the remediation? Has SEBI told them not to do any of the above? Why can’t they just freeze the account of investors and block all online logins including Mycams etc. and have messages flashing asking the investor to complete his/her KYC first?
There can be many ways we can work with our “partners” to complete this task quickly and efficiently – what we need is a meeting of minds and a sense of collective ownership, which is sadly lacking.
What happens for incomplete KYC cases despite best efforts?
Despite all efforts to complete this KYC remediation for all at the earliest, there are many folios where the investor is non-contactable, moved out of India, death cases with family dispute and many others where KYC will not be completed in near future. Why should the distributor be penalised for this? Is it the distributor’s fault that the investor resettled overseas? Does the distributor have any control on life events in the families he serves? AMFI needs to take up this issue urgently and provide us a just and reasonable solution and relief.
Only one long term solution
This is yet another example of distributors suffering as we are not able to protect our rights. There needs to be greater unity and a single voice for all IFA’s. We need to act fast and come under a single umbrella, which we believe is FIFA. Request every IFA to join FIFA at the earliest! Save yourself from these ever increasing Devils of distribution! (Click here to join FIFA)
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