Amfi imposes 12-month lock-in on commissions to curb distributor misuse, protect investors

Effective 11 August, investors will now have 11 calendar days to review and act on requests to change the distributor (ARN) linked to their mutual fund folios. A switch will only be processed if the investor explicitly approves it within this window. If no action is taken, the request will lapse.

More significantly, Amfi has doubled the cooling-off period for trail commissions to 12 months. That means if a client’s assets move to a new distributor, the new mutual fund distributor (MFD) will not earn any commission on those assets for a full year.

The revised rules will not apply to direct-to-investor platforms such as Zerodha Coin, Groww, and Kuvera, which only offer direct mutual funds without distributor involvement.

Protection for investors

Among the most investor-facing changes is a new SMS alert system. Whenever a distributor switch is initiated, investors will receive a notification, giving them an 11-day window to respond. The aim is to reduce unauthorized or misleading switches, a persistent concern for investors.

Kartik Sankaran, an Amfi-registered mutual fund distributor and founder of Fiscal Fitness, called the reform a long-needed improvement. “In the past, there have been cases where investors were approached for loans against shares or portfolio reviews, only to later find their ARN switched without clear consent. These new checks help prevent such misuse and raise transparency,” he said.

The updated framework also allows investors to change their distributor without liquidating and reinvesting their mutual fund holdings, a process that often created friction.

Sankaran said the change would encourage competition among advisors while preserving investor continuity. “It keeps client interests front and centre, and allows high-quality MFDs to grow on merit.”

What triggered this reform

The changes appear to be driven by mounting concerns over unauthorized transactions and misuse by mutual fund distributors, according to industry experts.

While Amfi hasn’t officially attributed the reforms to a specific trigger, recent disclosures and regulatory actions suggest both pressure and precedent played a role.

In line with directive from the Securities and Exchange Board of India (Sebi) for greater transparency, mutual fund houses have started publishing quarterly mis-selling disclosures on their websites. These reports detail violations by distributors and the actions taken.

As Mint reported earlier, in the January-March quarter, four large asset management companies—HDFC AMC, Nippon India AMC, Kotak AMC, and Axis AMC—reported six cases of mis-selling. Five involved unauthorized switches, where investors were moved between schemes without consent, often motivated by higher commissions. Such transactions can also expose investors to capital gains tax.

Although the number appears small given the size of the industry, experts believe it’s likely underreported. Many investors may be unaware of such switches or may not pursue formal complaints.

Amfi’s own records show that 37 ARNs have been suspended and 27 terminated since inception. However, the reasons for these actions are not disclosed publicly.

A Sebi letter to Amfi dated 9 January detailed disciplinary actions against errant distributors, including reprimands, suspensions, and permanent debarments. In this context, the revised rules appear to be part of a broader push to strengthen distributor accountability and investor trust.

What distributors say

The Change of Broker (COB) facility was first introduced in 2009, following the removal of entry loads, to help investors consolidate holdings under a single advisor. Many of these switches were facilitated by online platforms and intermediaries.

“Helping clients consolidate their ’held away’ holdings irrespective of whether the asset is trail accretive or not goes a long way in building trust and fostering relationship,” says Manmeet Singh Khurana, a certified financial planner, founder of Wealth Dopes, and a corporate trainer.

In March 2024, Amfi had permitted trail commission payments on switched assets, subject to a six-month lock-in. Khurana described that move as welcome, since many MFDs had been consolidating client accounts without receiving compensation. The new one-year lock-in, he believes, goes too far.

“With a new multi-stage process involving the client, MFD, and RTA, which increases transparency and co-ownership, I feel the six-month cooling period could have been retained,” he said.

Under the revised rule, any trail commission for a newly acquired client will be withheld for 12 months after the switch, effectively requiring MFDs to service clients for a year without being paid.

“This is a real challenge,” said Sankaran. “It directly impacts younger MFDs who are trying to go independent and build a client-first practice. While the costs of serving clients don’t stop for the 12-month period, revenue does.”

He added that that a more balanced solution would have been to allow payouts after a lock-in period to ease cash-flow burdens while still protecting investor interests.

Pallav Bagaria, director at Sapient Finserv, said, “The direction and intent is right. A few tweaks can make it better for all stakeholders—investors, MF distributors, and the industry at large,” he said.

Bagaria supports Amfi’s intent to protect investors, but believes trust and fairness should go hand-in-hand. “If a distributor is delivering—being there for the client, understanding their goals, guiding them—then he deserves to be compensated fairly.”

While the changes may deter ARN poaching and protect original advisors, they also raise financial hurdles for MFDs looking to grow or go independent.

“Cooling-off periods may delay payments, but they cannot replace the importance of a strong distributor–investor relationship,” Bagaria said.

The bottom line

Investor safeguards have undoubtedly been strengthened—but the new rules also raise concerns about the viability of newer, independent mutual fund distributors. Some worry that without careful adjustments, the move could inadvertently deter the very advisors it hopes to empower.