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AMFI Guideline in the Dustbin

An NOC is still required to change agents despite an Amfi guideline that says it is not

On the heels of a story published in Outlook Money that highlighted mutual fund (MF) investors’ plight in shifting agents, on account of a No-Objection Certificate (NOC) requirement from the original agent (‘Consolidate Your Fund Folios’; 15 August 2007), and investor complaints alike, the Association of Mutual Funds of India (Amfi) issued a circular to all MFs on 5th September advising them to avoid asking for NOCs. Unfortunately, quite a few MFs have chosen to ignore the advice and still insist on an NOC.

Sticky trail
At the root of the problem is the trail commission that agents get. Also known as loyalty commission, MFs pay around 0.35 to 0.50 per cent of the prevailing investment value to the agents - in addition to the 2.25 per cent entry load at the time of initial investment – for as long as the investor stays invested.

MF sources told us that as soon as Amfi issued this directive, few unscrupulous agents started luring away investors of other agents on the premise of giving them some cash incentives and gifts. Not only do these new agents stand to grow in size and strength by acquiring new assets, they also start earning trail commission on investments acquired by someone else.

This is similar to the incentives or pass-back commission that agents used to pay investors earlier to attract inflows; a practice banned by the Securities and Exchange Board of India (Sebi). Sources also told us that a Surat-based MF agent was at helm of this practice.

Alarmed by this misuse, other agents have reportedly threatened MFs to withdraw their investor-base, en-masse, if MFs allow agent-swapping without an NOC. Adds Debashish Mohanty, head-retail sales, UTI mutual fund and one of the MFs that still insist on an NOC: “Large and corporate agents with financial and operational muscle could stand to unfairly gain at the expense of the smaller agents.”

Caught in the middle
But what if you are simply unhappy with your agent’s service standards and decide to switch agents? Should he then continue to earn on your investments despite you taking your business elsewhere? Mohanty, as well as a section of the industry, feels that investors have no right in deciding who gets the trail commission. “The trail commission is an agreement between the MF and the agent. Investors are never taken into confidence about it and are not even told upfront about it.”

Counters financial planner Lovaii Navlakhi: “If the agent-investor relationship involves the former servicing the latter like recommending and explaining schemes, help change the address/bank accounts when required, ensure direct credit of dividends, etc., then there is absolutely no justification for the previous agent to continue earning trail fee on the investment which was brought in by them, but which they have long forgotten to service. It is the investor's money after all, and how do the AMC and the distributor get to decide on a subject like this?”

It’s Amfi, not Sebi
The moot cause why the Amfi directive is not taken seriously is because it is merely an advice and not a law. On the contrary, Amfi chairman A.P. Kurian was in a denial mood. “Except for a handful few, all other MFs are following. The ones that aren’t, will need to explain their actions”. However, for it to become a law, Sebi needs to issue this directive that would make it binding on all MFs to follow it. An Amfi directive is not binding on MFs, as Amfi is not a regulator, but merely a trade body.

And in order to discourage illegal investor acquisition, perhaps Sebi could also bar MFs to pay the trail commission to the new agent on the acquired business, so that unscrupulous agents are stripped of any incentive to unfairly snatch their peers’ assets. This is one more reason why Sebi should expedite its investment advisor guidelines, make them more robust and ensure that best practices are adhered to by all parties.

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