FIFA Appeals to AMFI for Reconsideration of Commission Limitations

The move aims to foster better discussions between AMCs and distributors regarding financial agreements.

The Foundation of Independent Financial Advisors (FIFA) has approached the Association of Mutual Funds in India (AMFI), advocating for an amendment to the existing guidelines that cap commission increases for distributors. This appeal, outlined in a recent correspondence to AMFI, specifically targets the restrictions imposed on commission hikes for assets accumulated post-March 2015.

FIFA’s request to AMFI highlights the need to lift these restrictions, arguing that it would benefit mutual fund distributors currently grappling with diminishing margins. The group emphasizes the importance of facilitating discussions between mutual fund houses and Mutual Fund Distributors (MFDs), especially in scenarios where there’s an increase in Total Expense Ratio (TER) due to a reduction in the scheme’s size. FIFA’s statement elaborates, “We urge a reconsideration and adjustment of the current best practices circular to eliminate the limitations on enhancing distributor commissions. This change would not only address potential conflicts with SEBI’s consultation paper recommendations but also offer a much-needed respite to distributors facing continuous margin compression.”

FIFA also notes a disparity in the rules governing fund houses and distributors. While fund houses can adjust the TER based on the fund’s size, a similar flexibility is not extended to distributor commissions for assets created after March 2015. The statement from FIFA explains, “The rationale behind setting the TER is that it should decrease as the Asset Under Management (AUM) grows, benefiting from scale economies. However, if a significant drop in AUM occurs, leading to a permissible increase in the TER for mutual funds, it seems incongruous that the distributors’ commission remains rigidly fixed despite these changes.”

Dhruv Mehta, Chairman of FIFA, expressed his concerns, stating, “The outright prohibition on increasing distributor commissions contradicts the spirit of the best practices circular. It overlooks the interests of mutual fund distributors, who are significantly impacted by these regulations.”