What digital mutual fund platforms can charge: Takeaways from SEBI's response to Paytm Money's queries

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Earlier this month, the Securities and Exchange Board of India (SEBI) clarified that online platforms offering direct plans of mutual funds (MFs) cannot charge any fees, either to investors or fund houses, except for advisory services.

SEBI was responding to a letter sent by Paytm Money, which is registered with as an investment adviser (IA).

Other online platforms also have IA licenses, and need to comply with SEBI’s regulations for IAs.

What did Paytm Money want clarified?

Paytm Money, which is among the largest online MF platforms, in its letter to SEBI, said it bears expenses for various services such as KYC, payment gateway, technology hosting and platform costs, and “loses more money as the business expands.”

Now, the IA portal wanted to know if it could charge fund houses for these services, as they would have to bear these costs anyway, if investors routed amounts through them.

As Paytm Money offers direct MF plans to investors, which bypasses MF distributors, it can’t charge any commissions to investors.

What does SEBI’s response imply?

SEBI says that current regulations don’t allow IAs to charge any execution fees – whether for KYC, payment gateway or technology – from investors.

It adds that IAs cannot receive such payments directly or indirectly, under any name and so Paytm Money cannot ask fund houses to reimburse costs for these services.

“While Paytm Money’s reason appears to be genuine, SEBI doesn’t want IAs to charge for such services to prevent potential conflict of interest,” says Suresh Sadagopan, founder of Ladder7 Financial Advisories.

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“If platforms are allowed to charge fund houses for such services, it may possibly become some kind of remuneration and commission in another form. Fund houses paying more may be given preferential treatment. So, SEBI wants to avoid grey areas in the regulations,” he adds.

Need proper consent for charging advisory fee

Direct MF platforms such as Paytm Money can charge investors for advisory services, but not till investors okay the terms and conditions document, which is given to them in the SEBI-prescribed format.

Such a document informs investors about the obligations of the IA, risks involved with each investment, advisory fees and other important disclosures.

Paytm Money also asked SEBI if it can take electronic consent from its clients on these disclosures and share it with them for their records.

“It would not only save expenses, but also expedite the entire process,” Paytm Money says in its letter.

However, SEBI states that just taking electronic consent from investors and sharing the same on their e-mails may not be sufficient.

“This may not mean physical signatures of investors would be required. They can also sign electronically. SEBI just wants to make sure that there is an LOE as per requirements that investors go through the terms and conditions, and give their consent,” Sadagopan says.

Moneycontrol’s take

Digital MF platforms now account for a sizeable share of investor assets. SEBI has tried to encourage the use of technology, as well as direct plans, to widen the reach of mutual funds.

SEBI’s regulatory stance shows it doesn’t want growth at the cost of any wrongful practices of platforms or fund houses.