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In a nutshell
Simply asking SEBI not to go ahead with its plan for commission disclosure in account statements, is not going to get us anywhere
What is needed is for AMFI to make a robust representation to SEBI, which (1) sets a proper context and framework for any decision in this regard, (2) argues the case against cogently, (3) offers a credible alternative and (4) makes a strong case for a stable distribution regulation environment.
We give below 10 points which we think AMFI should communicate to SEBI in this regard. We hope AMFI will take this up in full sincerity.
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It appears, as expected, that SEBI is keen on commission disclosure in account statements despite AMFI's initial unfavourable response to the idea. There is talk about percentage disclosure and perhaps even absolute amount disclosure. In my previous article on this subject (Commission disclosure: take the bull by its horns), I had mentioned that simply requesting SEBI not to go ahead is not going to get us anywhere. We need AMFI to put out a robust case against this move, with well-reasoned arguments and at the same time offer a credible alternative to address their core concerns.
In my conversations with distributors, what comes out clearly is immense frustration with SEBI's constant tinkering with regulations and its fixation on commissions. Given that commission caps are now in place and direct plans are available as an alternative for investors, there is a sense of bewilderment among distributors about why SEBI continues to have a bee in its bonnet on distribution commissions. In the absence of an SRO, and given SEBI's reluctance to engage with distributors on matters that concern them, distributors are naturally looking to AMFI to voice their concerns appropriately with SEBI and ensure that a balanced view is taken.
10 points that AMFI should communicate to SEBI
I am giving below 10 points which I think AMFI needs to communicate clearly and strongly to SEBI.
AMFI has issued a best practice circular capping upfront commissions, which is being substantially complied by AMCs. AMFI has received confirmations on this from AMCs. With this move, the fear of mis-selling induced by high upfront commissions has substantially been addressed. A large proportion of distribution commissions now being paid out are trail commissions and not upfront commissions as was the case earlier. Trail commissions align the interests of investors, distributors and fund houses very well and as such do not induce any malpractices that may harm the interests of investors. There is no evidence from any other markets that suggest that trail commissions harm investors or in any way induce unhealthy sales practices There is a regulation in place for distributors to disclose commissions. AMFI has not received a material number of investor complaints on lack of disclosure of commissions. Neither has it received a material number of investor complaints on mis-selling which may indicate that the problem is endemic and requires more stringent regulations rather than action in isolated individual instances. In case SEBI has received a significant/material number of investor complaints that suggest an endemic problem that harms investor interests, it should share this with AMFI to enable AMFI to take appropriate action, and if necessary formulate additional measures to protect investors at large. On the basis of evidence on hand, it is difficult to come to a conclusion that the interests of investors at large is being compromised in the current regulatory dispensation, and that further commission disclosures are therefore warranted.
In any case, it needs to be understood that disclosure of commissions AFTER an investor has made an investment is no form of protection. What needs to be reviewed is whether there is adequate disclosure BEFORE an investment is made, and if required, consider steps to strengthen this aspect. If you disclose information that is considered important for an investor to take an informed investment decision in an account statement, you are actually informing him after he has already invested - which is not in his best interests. We will then see a debate starting on a "free look" period, to allow investors to unwind the transaction because material information was not disclosed before they invested. This is going in completely the wrong direction - for the investor as well as the industry. The pre-sale document that is completed and signed by the investor is the KIM. The KIM discloses separately total expenses of direct plans and regular plans for each scheme. The difference between these is the distribution expenses charged in regular plans. The KIM therefore already discloses the amount of commissions that are borne by investors when they choose to invest in a regular plan. In the interest of enhancing disclosure to address any residual concerns that may exist around commission disclosures, the existing disclosure of total expenses in the KIM can be expanded to include a break-up of total expenses into 4 expense heads: management fees, distribution commissions, R&T charges and other expenses. When tabulated, this disclosure can look like this (illustrative example): 
The mutual fund industry is very concerned that distribution is not expanding sufficiently to cater to growing demand. In the last 2 years, despite the industry AuM growing by over 50% cumulatively, the industry has been able to attract only around 6,000 new distributors each year. The number of active distributors, currently estimated at only some 25,000, is woefully inadequate to support the growth aspirations of the industry. Frequent changes in distribution regulations and a highly unstable business model are acting as major deterrents to distribution expansion. What is required to grow distribution is a clear commitment of a stable and predictable regulatory environment. Distributors provide the much needed last mile connect with investors, particularly in small towns. This last mile connect is not limited just to enabling an investor to buy suitable funds, but more importantly performs a critical role in helping investors stay on course through bouts of market volatility and thus actually obtain a good investment experience. A diminishing distribution force will actually do much more disservice to the small investor than the incremental benefit he may derive from enhanced disclosures. Orderly growth of distribution is very much in the interest of investors, and frequent changes in regulations certainly deters orderly growth.
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