The implementation of EUIN has created a fresh set of doubts in the minds of many distributors. Is this a back-door strategy to get distributors to become advisors and stop commissions? Should I simply ask all my clients to sign the execution-only declaration or are there risks in that strategy? There are many questions that distributors are discussing on implications of affixing the EUINs in application forms. We attempt to address the 5 key questions that seem to be bothering the distribution fraternity about the implications of writing down their EUINs in application forms.

EUIN has finally been rolled out effective June 1, 2013. We had in April 2013, discussed some of the implications of the EUIN roll-out (Click Here). The first few days after the roll-out have resulted in some confusion - which perhaps is always to be expected when any new norms are introduced. Many distributors withheld submitting application forms in the first couple of days of the month, as they were not sure whether they should put in their EUINs or ask clients to sign the execution-only statement.

5 key concerns in writing down the EUIN

The main concerns seem to be the following :

1. If I put in my EUIN, does that mean I am offering an advisory proposition? If I wish to remain a distributor and not seek SEBI registration as an investment advisor, and if I put in my EUIN, can this be a precedent to me being forced to become an advisor? Will this mean end to commissions?

2. For large distributors covered under the due diligence audit, if they have stated in their last audit that they offer an execution-only service, and they now put in their EUINs in application forms, will they be hauled up for inconsistency ? By virtue of writing down their EUINs, will they now be compelled to do risk profiling for all clients and suitability analysis for all products sold to all clients?

3. If I ask all my clients to sign the execution-only statement in all application forms, will AMCs cut out my commissions and ask me to "opt-in" and be happy with the 100 rupees transaction fee - because I am conclusively establishing that there is anyway no value that I am adding to clients?

4. If I ask all my clients to sign the execution-only statement in application forms for all transactions, will I get into trouble - ie is there something like a maximum percentage of execution-only transactions that are allowed per distributor?

5. If I put in my EUIN, am I taking too high a risk of being hauled up on mis-selling complaints if my clients lose money on their portfolios? How can I safeguard myself against mis-selling claims?

Lets try to analyse these doubts and hopefully find some answers.

EUIN = Investment Advisor?

The fundamental issue that needs to be clarified is the linkage between EUIN and advice. Let's go back to the SEBI circular which directed AMFI to create EUIN, to understand what SEBI wanted in the first place. Here is the extract from SEBI's Sep 13, 2012 circular :

EUIN is to be filled in whenever an investor buys / transacts in mutual funds after an interaction with a seller. The key word here is interaction, not advice. The key role here is sales, not advice. EUIN is supposed to be filled in whenever a mutual fund product has been sold by a licensed seller to an investor. By putting your EUIN, you are not holding out that you are an investment advisor, you are merely confirming that you are the person who the investor interacted with, on the basis of which the investor bought a mutual fund product.

The Investment Advisor regulations introduced by SEBI have nothing to do with EUINs. That's a completely different decision that you have to take - on whether you wish to seek registration as an Investment Advisor or wish to continue as an ARN holder. By putting your EUIN number, you are in no way running the risk of you being classified as an investment advisor and therefore have your commissions stopped. You are just confirming that you are the person who sold the product to the investor.

EUIN for large distributors covered under due diligence audits

During the inaugural round of due diligence audits conducted in 2012, many distributors stated that they offer an execution-only service and not an advisory service. Auditors' expectations of processes were less stringent for those who stated that their proposition was an execution-only service, as opposed to those who said that they offer an advisory service.

Now, the issue is whether putting in your EUIN in application forms means that yours is no longer an execution-only service. Does this mean that you will need to profile all your clients and establish product suitability for each one of them? Are you therefore better off, in such cases, in asking all your clients to sign against the execution-only declaration in all application forms?

The answer to this perhaps lies in going back to what an EUIN is supposed to signify. The EUIN pinpoints the sales person from your firm who interacted with the client during the sale of a mutual fund product to the client. If a distribution house therefore decides to ask all clients to sign the EO (execution-only) declaration, effectively it would signify that all transactions that took place under their ARN code were done without the involvement of any sales persons at all. This would seem rather strange, especially for distributors who have sales teams in place. This would perhaps seem equally strange even for an IFA who doesn't have any sales persons - how would it appear if his record for the year suggests that no transaction was carried out during the year under his code which involved his interactions with his clients during the time that they bought funds from him?

If the conclusion is that EUINs are indeed to be written whenever any sales person (including the ARB holder himself) interacted with a client during a mutual fund product sale, the next question for large distributors is what happens to the EO statement they made during their last due diligence audit? Will they now have to change their stance and state that they offer an advisory service? Will this mean that they will now have to conduct risk profiling for all their clients and establish product suitability for all sales?

It appears that regardless of whether they call their proposition advisory or EO, there seems to be no running away from profiling all clients. The August 22, 2011 SEBI circular seems quite clear on this aspect - extract given below :

As can be seen from this extract, even for EO transactions, the onus is on the distributor to have established that the proposed transaction is not in keeping with the client's profile and that this has been explicitly communicated to the client, and that the client is nevertheless happy to go ahead with the investment. How would you know that the product is not suitable if you haven't profiled your client in the first place? One imagines that the next time the auditors come around to audit, enough time would have been given to distributors to comply with this requirement, and as such, there may be an expectation to see a lot more client profiling evidence.

Given this background, not writing the EUIN on application forms is unlikely to absolve the distributor from any client profiling responsibilities that the due diligence guidelines prescribe.

100% EO transactions for an ARN holder = trouble?

There seems to be a concern that if distributors ask all their clients to sign the EO declaration, it may become a stepping stone for AMCs to question why commissions are to be paid when there is no sales effort. This could be a precursor to such distributors being asked to be happy with only the opt-in transaction fee of Rs.100 per transaction.

One would imagine that before getting into the commercial aspects, there could be some questions that the distributor may have to answer about how he manages a business where he never sells any product and all his clients make up their minds entirely by themselves and only use him to facilitate the transaction. While there is no prescription as of now on any maximum percentage of EO transactions allowable for an ARN holder, one can perhaps visualise that once the distribution SRO comes into being, aspects like this could well come under the scanner. We have seen in our industry that anything that gets blatantly misused does get plugged. It would only be a matter of time before questions start coming the way of distributors who choose to go the 100% EO route.

Does EUIN expose me to mis-selling risks more than not putting EUIN?

Apart from the worry about EUIN being deemed as advisory and therefore potential loss of commissions, the other key fear is whether writing down the EUIN exposes distributors to mis-selling risks more than not writing it down.

Dhruv Mehta, Chairman FIFA made a pertinent observation : "As an IFA, I am anyway answerable to all my clients. My ARN is anyway captured in all my transactions. If a client is aggrieved about something wrong that he thinks I have done, he can anyway proceed against me, on the basis of the ARN number. What is the incremental risk that I am running by writing down one more number which is my EUIN? Even for IFAs with a couple of salespersons, can you realistically distance yourself completely from the actions of your salespersons? Will you not be responsible to your clients for the acts of your couple of salespersons? So, what is the incremental risk you are taking as an entrepreneur by putting down your EUIN?"

There is of course a counter argument to this - which says that if a client has signed the EO statement, he cannot file a mis-selling complaint against you because he has cleared agreed that he took his purchase decision entirely on his own. This approach perhaps runs the risk of missing the bigger picture - the client's view.

The bigger picture - how will your clients view this?

In all this debate on whether to write down your EUIN or no, one must pause for a moment and reflect on the wordings of the EO statement that the client is supposed to sign off :

If, after a 30 minute discussion, your client agrees with your suggestions on where to invest, and then you ask him to sign against the above declaration - and if he were to read it - what will go on in his mind? What is the message that you will be passing on to him? Will his confidence in your value addition increase or decrease each time you ask him to sign this declaration? Each time he is asked to declare that he is on his own and that nobody has guided or advised him, how do you think he will feel? How will this reflect on your business?

You can of course take comfort in the notion that nobody reads the forms anyway and therefore it won't matter at all. You may well be right - for now. How long will this notion continue to be right - that's anybody's guess.

What do you think?

Do these observations address some of your concerns on whether to write down your EUIN or not in application forms? How comfortable are you that writing down your EUIN does not mean potential loss of commissions? Do you agree with the view that as an IFA, you are not incrementally exposed to any further risks by affixing your EUIN on the application forms? Do you agree with the view that since investors rarely read application forms, asking them to sign the EO statement is not really going to negatively impact their impression about you and the value that you add? Share your thoughts will your peers across the country, by posting your comments in the box below - its YOUR forum !

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