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The Securities and Exchange Commission of Pakistan (SECP) while ordering disciplinary action against sales staff involved in mis-selling has observed that the practice of some sales agents to highlight the returns more without highlighting the associated risks and explaining potential downside of investing in mutual funds would be a case of mis-selling.
This has been stated by Commissioner Specialised Companies Division (SCD) against a mutual fund company with the directions to improve its shortcomings and ensure comprehensive training for its staff as well as distributors' sales staff and take strict disciplinary action against staffers who are found to be mis-selling. Moreover, the company must ensure strict compliance with the applicable regulatory framework in future.
According to the SECP order, the order has disposed of proceedings against a public limited company licensed to undertake business of Asset Management and Investment Advisory Services.
Shagufta Kanwal (complainant) had lodged a complaint alleging that she has invested an amount of Rs 5 million on October 3, 2017 in funds managed by the company. An amount of Rs 4 million was invested in a fund and while Rs 1 million were invested in the second fund. An amount of Rs 94,020 was charged as front-end load on the said investment. However, when the complainant proceeded for redemption, the investment amount had declined to Rs 4.634 million as on October 12, 2018. The complainant did not receive any account statement until September 2018.
Upon receipt of the complaint, the matter was referred to the Supervision and Enforcement Department of the (SCD), the SECP said. The Commissioner Specialised Companies Division concluded that the arguments submitted by the investment management company are not tenable on certain grounds.
The Commissioner SCD observed that it is the key responsibility of the distributor to train its sales staff with respect to its products. In the instant case, the lady was a housewife and cannot be expected to be completely conversant with mutual funds. In any case, for a first time investor it is challenging to understand the dynamics of mutual funds without adequate support and guidance from the seller. Had the sales agent acted with diligence, he would have explained the product and its associated risks and would have advised the complainant to fill out and sign the form, before accepting it from her. "In my view, since the distributor is selling the products of the AMC, it is imperative to ensure that the sales staff is fully equipped with complete information pertaining to all the products the AMC is offering. The sales agents must be able to guide the investors regarding the sustainability of the products being pitched, in line with the risk profile of that particular investor," the commissioner SCD said.
The commissioner SCD further said that a more professional attitude should have been adopted towards making the customers account as DND instead of doing the same on the basis of verbal instructions of the customer. This reflects failure of the operational procedure of the asset management company (AMC).
Compensating the loss incurred by the complainant does not imply that the incidence of mis-selling does not occur. In order to lock in the sale, the practice of some sales agents to highlight the returns more without highlighting the associated risks and explaining potential downside of investing in mutual funds would be a case of mis-selling.
"In my opinion, sales and marketing of mutual funds is a specialised area and the work concerned branch manager appeared to have not been trained for this kind of work," the Commissioner SCD said.
By taking a lenient view in this instance, owing to the compensation made to the complainant by the AMC and assurance by the company that it will improve its shortcomings, the company is hereby warned to ensure comprehensive training for its staff as well as distributors sales staff and take strict disciplinary action against those who are found to be mis-selling. Moreover, the company must ensure strict compliance with the applicable regulatory framework, the SECP added.

Copyright Business Recorder, 2019

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