The maximum commissions being paid by a mutual fund company is to banks, often of the same group, for pushing their schemes. And SEBI wants fund companies to control distributors!

What are the best mutual funds to invest in? There are various easy ways of finding this out. But one of the worst ways is asking your bank relationship manager. Sample this data. Of the Rs21 crore commission paid out to major distributors by Axis Mutual Fund, Rs 14.19 crore or 68% has gone to Axis Bank. Of the Rs288 crore commission paid out by HDFC Mutual Fund one of the largest chunks (14%) has gone to HDFC Bank, which is 35% of the commission earned by HDFC Bank. It is the same with other groups which are into both banking and mutual funds businesses. And when the money is not going so much to the bank of the same group, it is going to another bank.

Clearly, for each bank, the best mutual schemes are none other than the schemes belonging to their own group or the ones that offers the maximum commission. This makes a nonsense of the Securities and Exchange Board of India’s (SEBI) efforts to ensure that distributors do sell fund schemes in an unbiased manner in the interest of customers. To this end, SEBI had issued a direction to asset management companies in 22nd August. As per the SEBI circular, mutual funds are supposed to ensure that customer relationship and transactions shall be categorised either as ‘advisory’ or ‘execution only’. For the advisory function, the distributor will sell “only that product categorisation that is identified as best suited for investors within a defined upper ceiling of risk appetite. No exception shall be made.” For the ‘execution-only’ relationship, if “the distributor has information to believe that the transaction is not appropriate for the customer, a written communication be made to the investor regarding the unsuitability of the product. The communication shall have to be duly acknowledged and accepted by (the) investor.”We had pointed out that this circular was meaningless. “AMCs are really at the mercy of large distributors and SEBI’s move to regulate the latter through AMCs only means looking at the problem of mis-selling from the opposite end! Unless SEBI regulates large distributors directly, the 22nd August circular will have far less meaning than what is intended. http://www.moneylife.in/article/sebi-circular-on-mutual-fund-due-diligence-given-the-go-by/20386.html

The data showing that banks push hard schemes belonging to the group which may or may not be in customer interest proves our point once again. Here are some facts based on thousands of customers we interact with. Mis-selling by banks is pervasive. Bankers command enormous reach and trust among their customers. All banking processes are geared to maximise sales and profits and this leads to hard selling of products by the so-called ‘relationship managers (RMs)’. RMs at banks have to meet stiff sales targets month after month. They often don’t have sufficient knowledge of the products and learn quickly on the job that the only thing that matters is the sales target. So they just learn to make money from gullible investors.

Unfortunately, savers don’t know this and tend to trust their bankers. After all, that is the place where they keep their savings.

Banks have a readymade database of their clients’ personal details and their financial situation. Armed with such information it is easy for them to cross-sell financial products such as mutual funds and insurance. But this selling usually does not take the customer’s interest into account. It is purely driven by commission. Moneylife has covered many such cases in the past, the most glaring one which the wealth management arm of Kotak Mahindra Bank misled a customer into investing in its India Growth Fund at a steep premium, based on bogus claims and duped him of Rs2.27 crore. (Read: http://www.moneylife.in/article/12944.html)

Now that it is proven that banks are pushing hard fund schemes fund companies of the same group, how does SEBI plan to address this issue? And where does SEBI’s recent concept paper to deal with conflict of interest by separating advisory and sales stand now? A few months back Moneylife pointed out various flaws in the concept paper over a four-part article. One such flaw, as we had pointed out it did not take into account how would banks operate. They can have one desk which ‘advises’ and another desk that ‘executes sales’. It would be the same organisation—and the same mis-selling.