Distributors say the due diligence process for them may lead to duplication and lengthy paperwork
Mutual fund (MF) agents did not look pleased while going
through the five-page questionnaire that HDFC Asset Management Co. Ltd sent to
all its distributors late last week.
The questionnaire is part of the distributor due diligence
that capital markets regulator, Securities and Exchange Board of India (Sebi),
mandated the fund houses to do, as per its circular issued on 22 August. The
due diligence involves getting intricate details from distributors such as
their financials, processes, how they evaluate and recommend MF schemes to
their clients, the amount of disclosure they make to their clients, their
business model, experience, proficiency, their research techniques, and so on.
And that’s just the beginning. Like HDFC AMC, many other fund houses are
firming up plans to bombard MF distributors with their own versions of the due
diligence forms.
Mint’s mutual funds editor Kayezad Adajania says Sebi’s rule
on due diligence by mutual funds houses has left distributors deeply unhappy
Reliance Capital Asset Management Ltd, JM Financial Asset
Management Pvt. Ltd and Franklin Templeton Asset Management (India) Pvt. Ltd
have already emailed their distributors asking them to keep their records ready
and to expect a questionnaire from it soon. Mint has reviewed a copy of HDFC
AMC’s questionnaire as well as communications sent by various fund houses. This
comes just days after their annual commissions earned from selling MFs have
been publicly disclosed. Indian firms are not new to the concept of auditing
and due diligence but the distributor due diligence exercise that Sebi has
advocated seems to be a mess. Here’s why.
To standardize...
The circular started the much-awaited distributor
regulation, but puts the onus on fund houses as a first step towards regulating
distributors. It said that fund houses will need to evaluate distributors on
parameters mentioned earlier in the story. Fund houses have been told to
conduct this due diligence when empanelling distributors and then subsequently
once every year.
Last month, the Association of Mutual Funds of India (Amfi),
Indian MF industry’s trade body, started to firm up plans to outsource the task
of scrutinizing agents to audit and consultancy firms. Amfi had plans to
appoint three-four such firms to avoid monopoly and fund houses would then be
free to choose either one of these firms to do the due diligence on its behalf.
Sebi has laid out four broad parameters to identify
distributors who will be covered by this due diligence. A distributor who is
present across 20 locations and/or has raised assets under management over Rs.
100 crore across all MFs and/or received commission above Rs. 1 crore across
industry and/ or received commissions over Rs. 50 lakh from a single MF will
come under the ambit of due diligence.
…or take responsibility?
However, about 10 days back, Sebi wrote to fund houses
individually making it clear that it was the latter’s responsibility to do the
distributor diligence. “The tone of the letter suggested that fund houses would
need to do the due diligence work internally rather than getting anyone else to
do it,” said an industry official who did not want to be named.
Distributors aren’t convinced. “If I have to start filling
so many forms for as many fund houses that send them to me, when will I have
the time to do my business and address my clients’ needs?” said another
Mumbai-based distributor, who also did not want to be named. He adds that if
individual fund houses start sending such “lengthy forms”, many distributors
will start to disempanel themselves from smaller fund houses. Disempanel means
to withdraw a licence to sell a particular fund house’s schemes. In that case,
it would not be necessary for distributors to submit documents and participate
in that AMC’s due diligence process.
Industry sources say that at the heart of the matter is
Sebi’s fear about Amfi’s role in distributor evaluation and whether individual
fund houses are serious enough to take up this responsibility. “Sebi’s 22
August circular also says very clearly that individual AMCs should put in place
a due diligence process and that is where Amfi’s involvement may have ticked
off Sebi,” said a chief executive of a fund house who too did not want to be
named.
But diluting the AMC’s responsibility, Amfi says, was never
the intention. It believes that it’s perhaps a “miscommunication and hopes to
sort it out soon”. V. Ramesh, deputy chief executive officer, Amfi, says that
even in the outsourcing plan, the responsibility will rest solely with the fund
houses. “Outside firms will be brought in to only provide some sort of a common
platform and standardization to do due diligence. There is not going to be any
dilution in the AMC’s role or responsibility; a common platform is just a
facilitator to reduce paperwork and cost. Besides, smaller AMCs have various
distributors who sell schemes infrequently and it may not be cost-effective for
them to individually do a due diligence of all such distributors. Additionally,
fund houses will also be free to either ask for additional data over and above
what the common platform prescribes or they may be free to do the entire due
diligence on their own,” he says. An email sent to HDFC AMC did not elicit any
response. An official of Reliance Capital AMC replied: “Industry has been working
together to develop a common template and standardize questionnaire for
distributor due diligence for convenience of the distributors. However, the
onus will be on AMCs to ensure compliance.”
Harshendu Bindal, president, Franklin
Templeton Investments (India), says: “Our understanding is that
appointment of few common external auditors has been accepted. The other
aspects of distributor due diligence are still being discussed and we are
confident that a practical model taking into consideration all factors will
evolve from these discussions.”
“The effort to regulate distributors is in line with global
best practices that look to distinguish between different types of distribution
models. At the same time, we need to adopt a principle-based regulatory policy
that acknowledges the existence of these different distribution models.”
Classifying client’s transactions
The other part of this sordid saga is customer classification.
Soon, every time you buy an MF scheme, the distributor will have to classify
the transaction as either of the two: “advisory” or “execution only”. In other
words, most probably, you will need to file a declaration at the time of
investing in an MF whether you understood what your agent is selling to you and
what you are buying or whether your MF distributor has studied your needs well
enough and has recommended you the fund that is best suited to you. Last month,
Sebi also floated a concept paper on investment adviser guidelines on its
website and invited public feedback wherein it advocates that all distributors
should either act as “agent of the manufacture” or “adviser to investor”. For
now, Sebi has allowed MF distributors to be both; just that they will have to
classify all their transactions accordingly.
Though the broad contours are still being worked out,
distributors claim it’s tough to classify transaction. Says G.K. Balaji, head
of investing business, Way2Wealth Brokers Pvt. Ltd, “My relationship managers
who visit many clients on a daily basis will have to keep a very close track of
which clients or transactions are to be recorded in what way. Customer support
will then have to keep a track of such inputs too. It’s difficult for a human
being to remember all this though especially when one is always on the move and
ends up giving advice to all his clients.” Many distributors see themselves
moving to pure execution form. Says Surajit Misra, national head (mutual
funds), Bajaj Capital Ltd: “We will eventually move into a ‘transaction only’
form of MF selling. Of course, we will do the basic due diligence of our
customers. But since retail investors don’t tend to pay fees, it doesn’t make
sense to adopt the ‘advisory’ model’.”
Many also feel that it’s not easy to distinguish between an
advice and information. “A bank’s relationship manager might feel that he is
giving advice to customers, but in reality it might just be information,” says
the head of marketing of a fund house, who requested anonymity. There are
logistical issues too. “We have 200,000 customers and that makes it practically
very difficult to classify all our transactions. On a retail level, the average
value of an MF transaction is about Rs. 30,000-50,000, it’s very difficult”,
says Rajender Rautela, director of retail and HNI (high networth individual)
business, RR Investors Capital Pvt. Ltd, which is present in 21 cities across
India. This is perhaps turning out to be as much of a game-changer as, if not
bigger than, the abolition of entry loads that happened in August 2009. We’ll
keep you posted.
Source: http://www.livemint.com/2011/12/05215903/Tough-times-ahead-for-fund-dis.html?h=B
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