Banks are devising new ways to gouge money out of retail investors after SEBI’s decision to ban entry-load for MFs

The Securities and Exchange Board of India’s (SEBI) no-load decision is turning into a bonanza for banks. They are devising new ways of gouging money out of retail investors. Axis Bank’s newly launched equity mutual fund was unique in many ways, say large investors. Determined to make a successful offering, it set stiff subscription targets for branch managers and asked them to push their customers to subscribe to the fund. But, unknown to most customers, the Bank was quietly debiting a hefty Rs225 per application as ‘bank charges’. Many customers did not even realise that the mutual fund is a separate entity and they weren’t making a direct application which entails no load.

When SEBI scrapped entry-loads, ostensibly to protect investors, it didn’t put in place any mechanism to ensure they weren’t cheated. Instead, it said that investors must learn to pay for investment advice; if they subscribed to funds through independent financial advisors (IFAs), they must write them a separate cheque. While IFAs are struggling to collect such fees, banks have no such problems. They quickly contacted customers, offered to consolidate their mutual fund investments and began to debit a charge for the service. They also got them to sign a simple form to transfer their assets from their original distributor to the bank, allowing them to earn trail commission without doing any hard work. Axis Bank has gone a step further by debiting a charge for applying to its mutual fund as well. 

Now that SEBI knows about Axis Bank’s charges, it needs to do one of two things. Either act quickly to put an end to this practice or admit that protecting investors or reducing the commissions paid by them was never its aim. It must also demonstrate how it plans to enforce its new rule—that distributors must disclose to investors what they are charging and how.

Scrap Trails
Another potentially good move that has been messed up by SEBI due to thoughtless execution is permitting investors to switch distributors without obtaining their consent. Investors were permanently tied to their original distributors because mutual funds paid them a trail commission. This has triggered a war among banks and IFAs to grab clients and their investment by stealth in order to get access to free trail commissions. In fact, a back-check by two large mutual funds (UTI and DSP BlackRock) is understood to have revealed that a majority of investors don’t even realise that they are transferring an income stream when they sign a form to consolidate or update their existing mutual fund investments. 

There is no easy solution to the trail commission mess. On the one hand, it would be unfair to stop investors from walking away if a distributor offers no follow-up service; but it is equally unfair to offer trail commission to a new distributor who had done nothing to facilitate the investment decision.

Technically, trail commissions were meant to ensure that distributors did not encourage churning of portfolios merely to earn a commission on new investment. If trail commissions are scrapped, that is what will happen. Since SEBI failed to come up with a thoughtful solution, maybe the industry will respond and offer a workable alternative. If not, the fund industry will continue to sink while SEBI stands by and waits for it to learn to swim. As one fund manager said, “SEBI set out to fix bank distributors, but its actions have only made them stronger. They will rip off investors even more and the only loser will be the fund industry which will see drastic erosion in AUM (assets under management).”

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