Mis-selling by MFs: SEBI to plug loopholes

To plug mis-selling of mutual funds, an advisory committee set up by Securities and Exchange Board of India has proposed a series of stringent norms and processes that banks and other distributors will have to follow.

business Updated: Jun 04, 2010 13:44 IST
Sandeep Singh
Sandeep Singh
Hindustan Times

If you have been sold a wrong mutual fund, help is at hand to ensure it doesn’t recur. To plug mis-selling of mutual funds, an advisory

Five steps to seal mis-selling

1. Take customers on board — perform know your customer norms, look at the investor’s risk profile and investment objective
2. Product evaluation — products should be reviewed for the risk they carry and a written record to be maintained for suitability of the product to the customer
3. Transaction — provide written documentation to every client on product recommendation and statement of all fees earned.
4. Compliance process — recognise the potential
conflicts of interests and accordingly design a review process.
5. Management process — compensation and incentive structure should not conflict with the interest of mutual fund customers.

WHAT NEXT?Pressure will now fall on Insurance Regulatory and Development Authority to prevent similar mis-selling rampant in the insurance sector, particularly in ULIPs

committee set up by Securities and Exchange Board of India (SEBI) has proposed a series of stringent norms and processes that banks and other distributors will have to follow.

The SEBI-led committee that has representatives from the mutual fund industry as well as independent experts on Monday made recommendations that will prevent agents from selling wrong products to investors.

A sub-committee on “Right Selling Vs Mis-Selling: Building Institutional Processes,” has been formed to take these recommendations forward and will hold its first meeting in Mumbai on June 25.

According to the proposals, a copy of which is with Hindustan Times, mutual funds will have to be sold to potential investors on the basis of their appropriateness and affordability.

The products should be reviewed for risk and assigned to a pre-defined customer risk profile category.

Distributors will also have to maintain a written record of suitability of that product to that customer category.
“Further, it may be necessary to introduce ‘call recording’ for all conversations that sales or relationship managers have with customers,” the proposal says.

Distributors will have to follow steps such as labelling the organisational roles beginning from the sales manager to the management, documenting all processes and keeping relevant criteria for compensation and incentive structure so that they do not conflict with customer’s interest. They will have to provide written documentation to clients on product recommendation and the fee earned.

Written documents will also have to be maintained for sale of a product from the existing portfolio and also in case of a switchover with reasons for the same and investor’s approval.

A documentation of such sort will reduce mis-selling. Investors, however, may not like so much of documentation. “But this is the only way you can get a product with the proper safety net,” a source said on conditions of anonymity.

Distribution companies will have to design compensation and incentive structures that do not affect the investor’s interest. For example, the sales manager’s compensation should be oriented to customer retention and acquiring new customers rather than emphasising on transaction revenue, “as it encourages portfolio churn and conflicts with customers interest,” the report says.

First Published: Jun 03, 2010 22:57 IST