Examining the investment industry’s implementation of the client-focused reforms (CFRs) and scrutinizing risky firms, such as crypto trading platforms, are headlining the Ontario Securities Commission’s (OSC) compliance agenda.
The regulator issued a report detailing the work of its Compliance and Registrant Regulation (CRR) branch over the past year, highlighted by the results of its ongoing compliance reviews and issue-specific sweeps.
Among other things, the report noted that the results of a recent review into the implementation of the CFRs’ conflict of interest provisions that was carried out by the OSC with the rest of the Canadian Securities Administrators and the Canadian Investment Regulatory Organization will be published soon, along with new regulatory guidance in that area.
The OSC’s compliance review activity for the current fiscal year will focus on other aspects of the CFRs, the report noted.
“Looking ahead, we will prioritize a review of the know-your-client, know-your-product and suitability determination requirements in our continuing effort to assess the effectiveness of the implementation of the client-focused reforms,” said Debra Foubert, director of the CRR branch at the OSC, in a release.
Ahead of that work, Foubert noted in the report that “the regulatory expectation is that registrants have taken steps to review all aspects of their operations to fully implement the CFRs…. If we do not see the intended outcomes, then further regulatory action may be required.”
Alongside the ongoing focus on the CFRs, the regulator will target “high-risk” firms and crypto trading platforms in its current compliance work, she noted.
Already, the regulator has been closely reviewing crypto firms.
According to the report, despite all the adverse publicity and intensifying regulatory attention brought on by high-profile scandals in the sector, crypto trading platforms are still not adequately segregating client assets.
For instance, the regulator said it continued to find platforms that didn’t separate client assets from their own property, and didn’t have adequate oversight or policies to address custody-related risks.
It also found weaknesses in the supervisory structures of crypto firms and weak oversight of external service providers. And the OSC reminded firms in the sector to ensure that they have adequate business continuity plans (BCPs) in place.
“The recent string of bankruptcies and insolvencies in the cryptoasset sector (most notably throughout 2022) highlight the importance of implementing robust BCPs that cover potential business interruptions and potential downstream implications of failures arising from various market participants in the cryptoasset sector,” the report said.
In addition to its reviews of crypto firms, the OSC examined online portfolio managers, raising concerns about a number of issues in that segment of the business, including firms that aren’t yet putting clients’ interests first, particularly by limiting their product shelves.
“Staff is of the view that the practice of limiting products offered to clients, depending on how the client is being referred to the online adviser, is inconsistent with the online adviser’s obligations to address material conflicts in the best interest of the client and to make suitability determinations that put the client’s interests first,” the report said.
The review also highlighted issues with portfolio managers using hypothetical performance data to attract clients, and recruiting reps from rival firms without ensuring proper registration.