There are so many rules, regulations, regulatory policies and internal dealer or bank policies that make it close to impossible for an advisor to remain on top of it all. But what is the potential impact on an advisor who inadvertently breaches any of these policies?
Let’s assume that the breach committed was done without the advisor knowing about the rule or policy in the first place. Let’s also assume that the breach was not in the advisor’s interest, but solely for the benefit of the client. Even in these circumstances, this could severely impact an advisor’s career.
For example, a client, call him Q, asks his advisor to lend him money just for a month for a down payment — and Q intends to repay the advisor from proceeds of a GIC that will come due. The advisor agrees to lend Q the money on an interest-free basis. Is this a regulatory breach? You bet it is! Is this an internal policy breach? Yes, likely that too! Could this impact the advisor’s career? You bet it could! Worse than that, it could shake the foundation of his confidence and wreak havoc on his reputation.
Lending money to a client is a regulatory breach and very likely a breach of the dealer or bank policy that could severely impact an advisor because it could have employment and regulatory implications. Furthermore, if the client ever turned against the advisor and sued him and/or launched a complaint, this breach could be used to colour the evidence presented in court.
So what happens when the dealer or bank finds out that the advisor lent his client money? First, the dealer or bank launches an investigation to determine what precisely happened between Q and the advisor. The advisor will be interviewed, as will his team members. There might also be an audit of his clients to determine whether this is a single infraction or a regular practice. The advisor might be sent home pending the outcome of the investigation.
Next, the dealer will determine whether this is an infraction that needs to be registered with the regulator. If so, the regulator may launch its own investigation.
Depending on the outcome of the internal investigation, the dealer might choose to penalize the advisor, which could include termination. However, advisors should know that just because they committed an infraction, it doesn’t mean they will be unable to get hired by another dealer and be unable to convince the regulator that maintaining a license under certain supervisory conditions is appropriate. I have worked with several dealers and advisors to get them registered in circumstances of a breach or allegations thereof.
In addition, a regulatory infraction doesn’t necessarily mean that the dealer automatically has cause to terminate the advisor. There is a recent case out of British Columbia in which the advisor was terminated for cause in unusual circumstances for commingling her client’s money with her own, details of which are too complicated to describe in this short column. However the court found in favour of the advisor because this was a one-off infraction and the judge concluded that the penalty of termination was not proportionate to the infraction. The judge also found that the specific infraction was not expressly set out in the policy manual.
Although it might not be the end of the world to be investigated and terminated for an infraction, advisors feel like it is. Being sent home pending an internal investigation is horribly stressful. Furthermore, looking for another dealer to sponsor your licence is embarrassing, to say the least. Finally, the publicity associated with a regulatory settlement or hearing can negatively impact an advisor’s ability to grow his business as the decision is public and posted on the web for many years.
All this is to say that even if there’s no benefit to the advisor, you should take great care to understand and follow the regulations and internal policies because a regulatory or policy infraction can have a terrible impact on your life. Don’t let it happen to you.