Sebi may clamp down on mutual fund upfront fees; concerned over mis-selling due to high commissions
Sebi may clamp down on mutual fund upfront fees; concerned over mis-selling due to high commissions
Sebi is uneasy over the high commissions mutual funds paid distributors in the last six months to sell new fund offers (NFOs), which resulted in mis-selling.
MUMBAI: Capital market regulator Securities and Exchange Board of India (Sebi) may soon put restrictions on upfront commission paid by mutual funds to distributors, said four people familiar with the matter. The regulator is framing rules that could result in mutual funds shifting to a predominantly trail-fee model, where distributors are paid in a staggered manner till the time their clients remain invested in a scheme.
Sebi is uneasy over the high commissions mutual funds paid distributors in the last six months to sell new fund offers (NFOs), which resulted in mis-selling. In October, Association of Mutual Funds of India (AMFI), the industry trade body, voluntarily agreed that these asset managers would move to a trail commission structure after Sebi expressed concern over the rise in upfront fee paid to distributors.
But, mutual funds have been unable to reach a consensus on the matter, prompting Sebi to intervene. "We are studying various options to ensure that this huge upfront commission practice is discontinued," said a senior regulatory official.
Senior Sebi officials met chief executives of about 10-15 mutual funds individually last week for inputs to draft the norms, said a person in the know of the development.
"Sebi is clearly worried that talks within the industry have reached nowhere and that some of the members believe there is nothing wrong with upfront commissions. That's why it has come into the picture," said the chief executive of a mutual fund.
Various mutual funds, which raised money through close-ended equity schemes, paid distributors as much as a 6-8% upfront fees to push their new fund offers (NFOs) between June and September. Sebi felt higher upfront fees encouraged distributors to sell new funds to firsttime investors in equity schemes. The rally in stock markets made it easier for them to sell these products.
Financial advisors usually recommend schemes with a track record to new investors. Since the ban on entry load — an upfront fee that funds deducted from investors to pay distributors — in August 2009, most asset managers had largely moved to a trail-fee model.
Upfront commissions for open-ended equity schemes —the highest that distributors get — were in the range of 1.3% to 1.5%. But, such payouts increased after the launch of close-ended schemes, where investors' money is locked in for three to five years. Mutual funds paid the fees in advance for the entire tenure of the fund from their pockets.
"This practice is harmful for the fund industry because they are not gaining anything from it. At the same time, they are taking a hit," said a regulatory official.
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Sebi is uneasy over the high commissions mutual funds paid distributors in the last six months to sell new fund offers (NFOs), which resulted in mis-selling.
MUMBAI: Capital market regulator Securities and Exchange Board of India (Sebi) may soon put restrictions on upfront commission paid by mutual funds to distributors, said four people familiar with the matter. The regulator is framing rules that could result in mutual funds shifting to a predominantly trail-fee model, where distributors are paid in a staggered manner till the time their clients remain invested in a scheme.
Sebi is uneasy over the high commissions mutual funds paid distributors in the last six months to sell new fund offers (NFOs), which resulted in mis-selling. In October, Association of Mutual Funds of India (AMFI), the industry trade body, voluntarily agreed that these asset managers would move to a trail commission structure after Sebi expressed concern over the rise in upfront fee paid to distributors.
But, mutual funds have been unable to reach a consensus on the matter, prompting Sebi to intervene. "We are studying various options to ensure that this huge upfront commission practice is discontinued," said a senior regulatory official.
Senior Sebi officials met chief executives of about 10-15 mutual funds individually last week for inputs to draft the norms, said a person in the know of the development.
"Sebi is clearly worried that talks within the industry have reached nowhere and that some of the members believe there is nothing wrong with upfront commissions. That's why it has come into the picture," said the chief executive of a mutual fund.
Various mutual funds, which raised money through close-ended equity schemes, paid distributors as much as a 6-8% upfront fees to push their new fund offers (NFOs) between June and September. Sebi felt higher upfront fees encouraged distributors to sell new funds to firsttime investors in equity schemes. The rally in stock markets made it easier for them to sell these products.
Financial advisors usually recommend schemes with a track record to new investors. Since the ban on entry load — an upfront fee that funds deducted from investors to pay distributors — in August 2009, most asset managers had largely moved to a trail-fee model.
Upfront commissions for open-ended equity schemes —the highest that distributors get — were in the range of 1.3% to 1.5%. But, such payouts increased after the launch of close-ended schemes, where investors' money is locked in for three to five years. Mutual funds paid the fees in advance for the entire tenure of the fund from their pockets.
"This practice is harmful for the fund industry because they are not gaining anything from it. At the same time, they are taking a hit," said a regulatory official.
Sent from BlackBerry® on Airtel
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