A recent decision by the Association of Mutual Funds in India (Amfi) to cap upfront commissions in mutual funds at 1% had dismayed several distributors and market participants. Last week, there was a view that market regulator Securities and Exchange Board of India (Sebi) will look into concerns over upfront commissions. But, Sebi has said that it will not intervene into affairs of the mutual fund trade body.
On the sidelines of the CII Capital Market Summit on Monday, Sebi chairman, UK Sinha said, “This decision was taken by Amfi and it is under their jurisdiction. We would not like to get involved in the issue.” Last week, Amfi in its circular stated that the new regulation of 1% upfront commissions will be applicable from April 1, 2015. While there will be a cap on upfront commissions, fund houses can decide the trail on their own on perpetual basis. Trail commissions are paid to distributors as long as investors stays invested in scheme.
However the mutual fund distributor community had expressed its displeasure and dissent against Amfi’s decision. The Financial Intermediaries Association of India (FIAI) a financial distributors’ body in its release stated that, they are not in favour of fixing prices or mandating pricing formulas and / or getting into jointly deciding pricing matters for the distribution of mutual funds, as such initiatives are generally considered to be against free trade practices.
The press release also stated that, “We continue to pursue this matter with Sebi, Amfi and all asset management companies (AMCs) and we remain hopeful that in order to protect the growth of the Industry, investors interest and distributor economics, any such disruptive move will not be done without appropriate broad consultations.”
A CEO of midsize fund house on condition of anonymity said, “There were expectations that Sebi might look into the matter as several large distributors will get negatively impacted by this rule. But now I think we need to align ourselves with 1% upfront commissions in the mutual fund industry.”
This move is likely to hit several distributors who were getting commissions as high as 4-6% while selling equity schemes, especially the close ended equity schemes. In the last few months we have seen many fund houses come out with various new fund offer (NFOs) to ride the surge in the equity markets. However, FIAI believes that, capping upfront commissions will stop churning in the mutual fund industry.