SEBI mulls guidelines to contain mutual fund mis-selling by national distributors and banks   

June 2, 2010

 The market regulator is putting together guidelines for banks and national distributors to check mis-selling of mutual funds

Market watchdog Securities and Exchange Board of India (SEBI) is mulling further strengthening the mutual fund (MF) distribution system to prevent possible cases of mis-selling by banks and national distributors. Recently, the Association of Mutual Funds in India (AMFI) had sent a strict warning to national distributors like HSBC, NJ India Invest, HDFC Bank and Kotak Mahindra Bank who were actively engaged in the AUM transfer business. Incidentally, Moneylife had reported about such practices by national distributors earlier. (Read here: http://www.moneylife.in/article/8/3697.html).

However, these entities in their reply to AMFI did not show any signs of strengthening their guard against mis-selling.
 
SEBI has now proposed that the risk appetite, investment objective and affordability of the customer should match with the product. Besides, national distributors and banks will have to seek an acknowledgement document from the clients before a client invests in a scheme. The acknowledgement document will contain the customer category and a statement of fee earned from a particular product. The market regulator has also suggested recording the calls of all relationship managers with the customers for auditing and has also proposed periodic auditing and compliance of these new norms.

SEBI is working along with the National Institute of Securities Markets (NISM) to formulate the guidelines. The working group committee will also include representatives from banks and national distributors.

However, industry experts believe that mis-selling cannot be completely ruled out.

 “Some amount of mis-selling cannot be avoided in any profession. Some doctors prescribe medicines suggested by a pharmaceutical company. Some coaching classes don’t teach properly. In a democracy, nothing is mis-sold; it is either sold or not sold. If something is sold that means both parties have agreed. Mis-selling is more prevalent in Unit Linked Insurance Plans (ULIPs) and insurance but the regulator Insurance Regulatory and Development Authority (IRDA) is defending it. Mis-selling should be curbed by creating investor awareness by SEBI,” said a top official from a leading fund house.

“These recommendations are not feasible. All relationship managers will start calling from public booths. You can’t record conversations on mobile phones. It will deter national distributors from mis-selling but in some or the other way mis-selling will continue,” said a Mumbai-based financial planner.

Recently SEBI had asked fund houses to disclose all complaints received by them on their respective websites and in their annual reports by 30 June 2010 in order to increase transparency.— Moneylife Digital Team