Damodaran believes that misselling is not restricted to just selling products that should not be sold to customers. It also includes not selling a good product to them
Distributors of mutual funds and insurance products need to rely on 3 Ts --trust, transparency and technology -- to grow their business, former chairman of the Securities and Exchange Board of India M Damodaran said on November 27.
Referring to the misselling of products prevalent in the industry, Damodaran said that distributors need to establish trust among their clients.
The former regulator was speaking at an event on financial distribution. He said that misselling is not just about selling products that should not be sold to customers, but also about not selling a good product to them.
"If distributors do not sell a good product to people, they will lose trust and trust is central to all relationships," Damodaran said.
"You need transparency and technology along with trust. However, if trust is missing, technology and transparency are of no use. While distributors should welcome technology applications that have made life better, building trust is the key to grow," he said.
Sundeep Sikka, Executive Director and Chief Executive Officer at Reliance Mutual Fund, who was also present at the event, acknowledged that the quest for growth has given rise to misselling and other malpractices in the 43-player mutual fund industry.
"Such practices are not in the interest of end consumers. Sometimes this also results in putting pressure on the regulator to take extreme measures to establish a control mechanism," Sikka said.
"Hence the onus is on us to collectively curb wrong practices across the Industry and always keep the interest of end consumer in mind," he said.
SEBI has defined misselling as the sale of units of a mutual fund scheme by any person, directly or indirectly, by making a false or misleading statements, or concealing or omitting material facts about the scheme, or concealing the associated risk factors of the scheme, or not taking reasonable care to ensure suitability of the scheme to the buyer.
Damodaran also suggested that industry must develop simple products that are easy to understand.
"The industry should recognise that there has been a huge knowledge asymmetry between manufacturers, distributors and consumers. Also, complexity has been increasing because manufacturers want to challenge their own ability to come out with something complex. Hopefully manufacturers and distributors understand this but after that chain, no one understands the product," the former SEBI chairman said.
SEBI has taken several steps to curb misselling in the mutual fund industry. It's most recent circular on the matter was issued on October 22.
In order to bring about transparency in expenses, reduce churning of portfolio and misselling of mutual fund products, SEBI told asset management companies that all scheme-related expenses, including commissions paid to the distributors within the regulatory limits, shall have to be paid from the schemes only and not from the books of the respective AMC, its associates, sponsor, trustee or any other entity through any route.
The capital market regulator also asked AMCs to adopt full trail model of commissions in all schemes, without direct or indirect payment of any upfront commission or upfronting of any trail commission in cash or kind, sponsorships or any other route.
