The Securities and Exchange Board of India’s (Sebi) latest move asking mutual funds to disclose the actual amount paid as commission to distributors and also to provide details of expense ratio of direct and regular plans in the consolidated account statement issued to investors, has evoked strong response from the industry.
While some industry leaders posted their comments on Twitter and expressed their discontent, several distributors and industry experts are not only questioning the relevance of such move but are also calling for similar disclosures in case of other financial products.
While there is a perception that such disclosures may potentially influence unqualified retail investors to take the direct investment route and thereby force some distributors to exit the industry, there is also a view that there has to be uniformity in the levels of disclosures in case of various financial products for which various regulators will have to come together and decide on the same.
In a tweet on Monday, Sundeep Sikka, CEO, Reliance Capital Asset Management said, “Too frequent and disruptive regulatory changes for MF distributors can have a very negative impact on growth of AMC industry itself.” Nilesh Shah, MD of Kotak Mahindra AMC tweeted, “Hope insurance industry follows transparency standards of mutual fund industry in disclosing agents commission to investors.”
The reactions follow Sebi’s Friday circular that asked mutual funds to provide additional disclosures to investors in its consolidated account statement. The circular said that in order to increase transparency of information to investors, it has been decided that the CAS should provide, “The amount of actual commission paid by AMCs/Mutual Funds to distributors (in absolute terms) during the half-year period against the concerned investor’s total investments in each MF scheme.” It further said that in its half-yearly account statement issued to all mutual fund investors the fund houses will also have to provide the scheme’s average Total Expense Ratio (TER) for both direct and regular plan, in which the concerned investor has invested. Sikka said that while disclosures are good, it has to be relevant to the investors.
In case of direct plans, the investors are provided with the option to invest directly in the scheme of a fund house and thereby save on the commission that otherwise is required to be paid to distributors in case of regular plans. If an investor invests directly in equity schemes the TER is lower by 50 – 100 basis points (100 basis point is 1 per cent) in comparison to a regular plan.
While fund houses already disclose the TER for each scheme currently, some feel that the disclosure with respect to absolute amount paid in commission and a comparison of TER in direct and regular plan will dissuade the investors from taking the distributor route for investment.
An industry insider said that the role of distributor can’t be undermined. “The mutual fund penetration continues to remain very low and distributors play a key role this as they approach a new customer and handholds him through the investment process,” said the head of a mutual fund who did not wish to be named. But not everyone is opposed to the high levels of transparency proposed by the regulator and believe that the move will push greater transparency and help investors take informed decision. “It does not come as a surprise as the objective of more transparency has been under discussion over the last couple of years. It is a right thing to let the investor know how much of his TER is going to the distributor as commission and is he providing enough value for that money. It will push us to fortify our value for the investor and further upgrade our services,” said Rajiv Deep Bajaj, vice chairman and MD, Bajaj Capital. Stating that direct plans are for evolved investors, Bajaj proposed that the regulator should allow direct investment in mutual funds only for qualified investors who clear certain certifications.
While the debate continues in the mutual fund space, there is a growing demand for similar transparency in distributor commission for insurance products and the head of a leading financial services firm said, “Even we don’t understand the structure in case of traditional plans, though it is better structured for new generation products.” He also said that insurance sector will benefit as a result of these disclosures as small distributors may move out and start selling insurance products.
There are some who are calling for Sebi to take more steps for increasing mutual fund penetration. The head of a mutual fund company who did not wish to be named said that over the years, entry of new retail investors in the capital markets has not grown much. “Some initiative like the Pradhan Mantri Jan-Dhan Yojana should be initiated to get more and more retail investors in capital markets,” said the insider who did not wish to be named.