Monday, January 30, 2017

FUND FULCRUM
January 2017
(contd.)

Regulatory Rigmarole

AMFI has come up with a uniform set of guidelines for AMCs to implement government’s centralised KYC (CKYC) initiative which went live from July 15, 2016. From February 1, 2017, first time mutual fund investors will be required to fill the new CKYC form. The new CKYC forms capture additional details like mother’s name, maiden name, and FATCA details. AMCs will have to update this additional information on KRA as well as CKYC platform. SEBI had introduced KRAs in 2012 to have common KYC norms and eliminate duplication of KYC for all SEBI registered intermediaries. SEBI had given licenses to five KRAs - CDSL Ventures Ltd. (CVL), DotEx International Limited (DotEx), NSDL Database Management Ltd. (NDML), CAMS KYC Registration Agency (KRA), and Karvy Data Management Services. Investors who have completed CKYC can invest in mutual funds by quoting the 14-digit key identification number (KIN) allotted by Central KYC Records Registry (CKYCR) agency. To process the application, AMCs will have to download the KYC information of such investors from CKYCR system. Also, they will have to check whether the PAN of such investors is updated on CKYCR system. If not, AMCs have to collect a self-certified copy of investors PAN and upload it on CKYCR system. Further, AMFI has asked AMCs to modify their scheme application forms to capture the KIN. The industry body has urged AMCs to inform distributors and investors about complying with the new CKYC norms. A month back, all financial regulators - SEBI, PFRDA, RBI, and IRDAI had issued circulars instructing their respective regulated entities to upload KYC data of their customers on the CKYCR platform. Over a period of time, all investor data will be stored at a single place which can be accessed by all financial institutions to verify the KYC. All investors need to do is obtain a central KYC number from Central KYC Registry through the financial institutions and use it to invest in any financial product.  There will be no need to do multiple KYC.
BSE has extended the cut-off time for accepting transactions by 30 minutes in liquid, debt, and equity schemes from January 5, 2017. For liquid schemes, the cut-off time has been extended from 1 pm to 1.30 pm. Similarly, the new cut-off time for debt and equity schemes is 2.30 pm for transactions of Rs. 2 lakh and above. For transactions of below 2 lakh per application, the cut-off time is 3 pm. BSE has introduced a number of features in the recent past to make the platform seamless. For instance, the exchange has recently allowed mutual fund distributors to enroll themselves online. Currently over 2750 schemes of 39 AMCs are available on BSE StAR MF platform. BSE StAR MF has around 2,400 registered distributors. BSE StAR MF is a browser based automated online order collection system which can be accessed through web from anywhere. Distributors can initiate a number of transactions like invest, redeem, and start a SIP through this platform on behalf of their clients. It can be accessed via PDAs, tabs, laptops, or personal computer.
SEBI, in its board meeting held recently in Jaipur, has decided to allow celebrity endorsement of mutual funds at an industry level. Simply put, celebrities are not allowed to endorse a particular scheme or promote a fund house; instead, they can promote mutual funds at an industry level by promoting fundamental concepts such as benefits of long-term investments, starting a SIP to create wealth, and managing cash flows through liquid funds. Following SEBI’s diktat, fund houses are required to contribute one basis point of AUM to AMFI. Based on AUM of Rs.16.46 lakh crore as on December 2016, AMFI will have close Rs.165 crore at its discretion to spend on creating awareness about mutual funds this year. AMFI may use this corpus for celebrity endorsements. In addition, SEBI has decided to allow fund houses to advertise CAGR returns for the past 1 year, 3 years, 5 years, and since inception. Currently, AMCs can only publish scheme’s returns for twelve months period. Also, fund houses can advertise performance of other schemes managed by the fund manager. On web advertisements, AMCs can now provide back link to give a summarized information on returns.
Ministry of Finance has invited comments from stakeholders on the recommendations of Financial Sector Legislative Reforms Commission’s (FSLRC) suggestion to set up a Financial Redressal Agency (FRA). This agency will resolve consumer complaints against all financial services companies across regulators. The last date to submit feedback is January 2017. The committee headed by former Judge of the Supreme Court of India B. N. Srikrishna has also proposed a new financial consumer protection legislation to empower FRA to provide redress and to strengthen preventive regulatory framework on consumer protection. The government has already set up a task force in June 2015 to implement committee’s suggestions. The task force has observed that consumers are put under unnecessary stress as they are required to approach different ombudsman. This stress is further amplified due to varying levels of consumer protection across regulators. Further, there is a lack of powers to award compensation in some cases, pushing consumers to courts/consumer forums. The FRA is expected to enable retail consumers in remote locations to resolve their complaints without imposing significant costs on them. Consumers can approach Securities Appellate Tribunal (SAT) if they are not satisfied with FRA’s orders. The FRA is proposed to be set up with an initial budget of Rs. 100 crore. The operational costs of FRA will be funded by collecting fees from different regulators. The regulators will have to collect this fee from their respective regulated entities based on the size of the entities and number of complaints received by them. No fee will be charged to the consumer. The FRA will be operationalised in two phases. In the first phase, FRA will redress complaints handled by Insurance Regulatory and Development Authority of India (IRDAI), Insurance Ombudsman, and Pension Fund Regulatory and Development Authority (PFRDA). In the second phase, FRA will handle complaints against entities regulated by SEBI and retail complaints handled by Reserve Bank of India (RBI) and Banking Ombudsman. The FRA would be managed by a Board appointed by the financial regulators, in consultation with the government. It would also have an Independent Assessment Officer to consider complaints against the FRA’s redress function arising out of issues related to its standard of service. This was announced by Finance Minister Arun Jaitley in his 2015-16 budget speech.
Ahead of Budget 2017-18, the Association of Mutual Funds in India (AMFI) handed over its wish-list to Finance Minister Arun Jaitley.
Debt scheme under Sec 80 CCC
AMFI has proposed for debt-linked savings scheme to be included under the Sec 80 CCC limit. Currently, only equity-linked savings scheme — popularly known as ELSS — qualifies for tax benefits under Section 80 CCC of the Income Tax Act, up to an investment limit of Rs 1.5 lakh in a financial year. Besides, the mutual fund body also made a proposal to extend the tax benefits — currently available under Rajiv Gandhi Equity Savings Scheme (RGESS) — to all equity fund investors. In 2012, the UPA government had introduced RGESS only for first-time investors with annual income below Rs. 12 lakh a year, as a way to promote the “equity culture”.
Rs. 1.5 lakh tax benefit cap
AMFI has asked for raising the tax benefit limit to Rs. 1.5 lakh a year from Rs. 50,000 now.
Mutual Fund Long Term Retirement Plan
AMFI has also proposed a Mutual Fund Long Term Retirement Plan (MFLRP) — akin to the 401(k) plan in the US. Under this plan, investors would get to invest in the MFLRP — with portfolio options, such as conservative, moderate, and aggressive — based on the risk-taking appetite of the investor. The investor would get to redeem the full investment when he turns 60. There was a mention about it in Budget 2014. AMFI is bringing it to the notice of the Finance Ministry.

Capital gains tax plans
Lastly, AMFI has also pushed the case for extending Sec 54 EC benefit for mutual fund schemes with lock-in period of, say, three to five years. Under Sec 54 EC of the Income Tax Act, investors save on capital gains tax that need to be paid on sale/transfer of long-term capital assets, by investing in National Highways Authority of India (NHAI) bonds.

Robo advisory is the new buzzword in the financial advisory profession. According to an Infosys white paper ‘Increasing the efficiency and effectiveness of Financial Advice with Robo-Advisors’ this channel will grow at a healthy pace in the next four years. In fact, the company has found that globally, robo advisers had assets under advisory of US$19billion in 2014 which is set to increase to US$2.2 trillion by 2020. This translates to a CAGR of 120%. The company has attributed this growth to low costs of advisory fee. “Investors gain advice at much cheaper costs than the fees charged by human advisors. For instance, compared to an average 100 basis points charged by a human financial advisor, a robo-adviser cost just an average 30 basis points of AUM.” The white paper says that robo advisers have the potential to disrupt the existing wealth management setup, which is dominated by human-only distribution channels. The paper suggests that hybrid advisory model where human advisers and robo advisers work together is the way forward. “In 2014, robo-advisors were perceived as an outright threat to their human counterparts. However, 2015 has indicated that robo-and human advisers can co-exist. In fact, a hybrid route seems to be the way forward where a robo-advisor complements a human adviser in giving advice. This can provide numerous benefits: faster AUM growth, especially net inflows, newer opportunities in upcoming market segments comprising millennials, better empowerment of human financial advisors with time to think innovatively, and more opportunities to cross-sell high-margin advice.”

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