Bose panel blames mis-selling of MFs on upfront commissions paid to agents
Mutual funds' AUM from small towns grew to Rs 1.89 lakh crore at the end of March this year from Rs 1.39 lakh crore from the year-ago level.
Mumbai: The high-powered Sumit Bose committee, set up by the finance ministry in 2014 to recommend measures to curb mis-selling of financial products and rationalising distribution incentives, has called for a complete phase out of any upfront fees for agents.
“Any upfront commissions in any investment products and the investment portion of any bundled products skew seller behaviour and lead to mis-selling and churning, therefore these should be phased out completely,” said the report that was submitted to the finance ministry last week.
The system of incentives should align the interest of the three parts of the market — the manufacturer, the advisor and the customer, the report said. When contacted, Mr Bose, who was the former finance secretary and who headed the panel, said that “high upfront commissions lead to pushing of those products which get the agent higher fees, and this leads to mis-selling and therefore we called for phasing out of upfront commissions in investment products”.
Asked about implementation of the recommendations, he said it is up to the government and the sectoral regulators to decide to implement in a in time-bound manner or reject the report. The report, however, has suggested that upfront commissions for pure mortality products may continue since selling pure life cover is relatively difficult.
Also special incentives may be given to the distributors when they have to reach out to a specific consumer segment under any mandatory provision, for instance insurance cover in rural areas.
The report has also said for investment products, and investment portion of bundled products, commissions should move to an all trail model which should be either maintained at specific levels or should keep declining as the product matures.
When contacted, mutual fund houses said the matter has to be discussed by the industry body AMFI and then only they can take a view. “As of now, we are adhering to the norms stipulated by AMFI as per which upfront commissions shouldn’t exceed one per cent, while trail commission remains the same all through. “Now as the Bose committee report is out, we will first wait for AMFI to deliberate on the recommendations to take a view,” SBI MF managing director and CEO Dinesh Khara said.
MFs likely to cost less in small towns
Investors from smaller towns may have to pay less for investing in mutual fund products as industry body Amfi is looking to reduce expense ratio by 30 basis points by October 2016.
Besides, it is planning to do away from the current practice of disclosing overall Assets Under Management (AUM) by fund houses and restrict it to only retail AUM. These issues are expected to be discussed in the board meeting of Amfi on September 16.
The industry body has proposed to slash expense ratio by 10 basis points, effective October 1, followed by another 10 basis points reduction, effective April 1, 2016 and further 10 basis points, effective October 1, 2016.
( Source : PTI )
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