IIROC uncovers inappropriate retail leverage strategies

In the guidance, IIROC reports that its compliance staff have uncovered a growing number of cases where “inappropriate” leverage strategies are being used by retail investors. Staff have also seen situations where clients haven’t been provided with sufficient information to understand the risks associated with leverage strategies, or the details of their debt servicing obligations.

The guidance reminds advisors of their suitability obligations when they recommend a leverage strategy, or become aware that a client is using this approach. It stresses that advisors must ensure the risks are fully explained, and that clients are aware of the potential impact of leveraging based on their financial situation, risk appetite and ability to withstand loss. And, it includes a checklist for advisors detailing the issues they should consider before making recommendations about leveraging.

For dealers, the guidance emphasizes that they must have sound policies, procedures, and controls, in place when leverage strategies are recommended by the firm and its reps; and, it outlines the minimum controls that dealers should have to identify and supervise the use of these sorts of strategies.

The guidance also aims to help firms address the challenge of clients using “off book” loans, whether recommended by their advisor or not. It notes that dealers must have adequate systems and controls to identify accounts that involve recommended off-book loans to ensure they are properly supervised. And, that dealers should also have controls designed to identify accounts that may be funded with undisclosed off-book loans that were not recommended by their advisor.

It acknowledges that it can be tough to detect, and supervise, undisclosed off-book loans; and, that firms aren’t expected to be perfect in this area, but it also notes that dealers and reps should not ignore red flags that clients may be borrowing to invest.

“IIROC’s guidance when borrowing-to-invest strategies are used highlights best practices for registered representatives and firms to help them comply with their suitability and supervision obligations,” said IIROC president and CEO, Susan Wolburgh Jenah.

Along with the guidance, which is targeted at dealers and reps, IIROC has also issued a bulletin for investors that outlines the factors they should consider when deciding whether a leverage strategy is appropriate. It also stresses the importance of disclosing their other loans to their advisor before making a decision.

Additionally, IIROC notes that its compliance department will be focusing on the use of leverage strategies as part of its examination process. In particular, it will be examining situations where off-book lending is being recommended, to ensure that dealers are meeting their suitability obligations and supervisory requirements.