The regulator has sought details from bank-sponsored mutual funds on how much of their sales happen through their parents, policy for fee payments to distributors and commission structures for parent banks compared to other distributors, the people said. Sebi did not disclose in its communication why it has asked for the data from these asset management companies, but senior mutual fund industry officials said the move reflects the regulator’s discomfort over the lack of an ‘open architecture’ model at some of these banks. In the open architecture system followed in insurance distribution, corporate agents like banks sell products of multiple insurers.
An email query to Sebi went unanswered till the time of going to print.
“The question that Sebi seems to be asking is whether mutual funds sponsored by banks are overly reliant on the parent banks for selling their products,” said the chief executive officer of a large mutual fund. “In cases where bank branches predominantly sell the schemes of its MFs, there are no choices for investors. That could be construed as mis-selling.” Industry officials who spoke to ET on the matter did not wish to be named citing sensitivity.
Most domestic banks such as
, ICICI, , Axis, Kotak, and Union among others own mutual funds or have majority stakes in these asset managers. The extent to which these banks sell products of their subsidiary mutual funds vary from 25% to over 95%, according to industry estimates.
Mutual fund industry officials said Sebi’s enquiries to the bank-owned mutual funds could be in the wake of complaints from rival asset managers and a section of the distributor community. In the intense race to boost assets under management, mutual funds, which are not owned by banks, have been resentful they are at a disadvantage in the absence of a captive distribution network. That has resulted in these fund houses losing market share. Meanwhile, some mutual fund distributors have been complaining that they have lost out on business or received lesser fees for selling schemes of mutual funds owned by banks.
“The competitive advantage that these funds have is just one part of the story,” said the CEO of a mutual fund owned by a financial services group. “The bigger issue is that badly performing schemes are being sold by banks to its clients only because it belongs to a subsidiary. Isn’t that mis-selling?”
Mutual funds sell their products through distributors and directly. Third party distributors are mostly wealth managers, independent firms, bank branches or individuals.
While wealth management units of banks sell schemes of all mutual funds, its branches mostly push products owned by the subsidiary mutual funds. Banks are known to have the best distribution network because of branches all over the country. By selling mutual fund products, banks’ profitability is boosted through fee income.
Another advantage is that the growing asset base of the mutual fund subsidiary drives up the valuations.
“Its true that most bank branch managers have no real expertise to sell a mutual fund scheme and are selling it just like a fixed deposit,” said the CEO of a bank-owned mutual fund. “But let’s not pretend that non-bank mutual funds do not have favourite distributors, who sell only their products because of better incentives.”