As Canada’s investment regulatory environment grows stricter, advisors need to follow basic best practices to protect themselves, and understand what’s covered by their errors and omissions (E&O) insurance, Amanda Calder, a claims manager with Axis Capital in Toronto, said at the International Financial Brokers of Canada summit Thursday.
Tips include documenting each client interaction, staying within their practice area and licensing limits, and understanding when they need to report a claim for E&O insurance coverage.
Higher fines, stricter monitoring
The Canadian Investment Regulatory Organization’s (CIRO) treatment of minor infractions is an example of the tougher regulatory environment facing advisors. In the past, CIRO addressed cases where no financial harm was done with warning letters or fines under $5,000. Recently, it has begun issuing fines above $5,000 plus disgorgement for similar types of cases, Calder said.
FP Canada has conducted reviews through its standards council division, upon notice of CIRO doing the same. The standards council gets information on ongoing cases from members’ renewal forms, which ask whether the advisor is involved in any active proceedings, and may be escalated to an investigation, FP Canada said in an email.
In addition, the Ombudsman for Banking Services and Investments (OBSI) has started requesting interviews with advisors. Traditionally, it requested advisors’ files through dealers. Although compliance is optional, Calder said dealers and managing general agents would prefer that advisors comply with OBSI requests.
Leave a paper trail
Advisors need to check in with clients to review their insurance coverage at least annually and document each attempt to reach a client, even if it goes unanswered, Calder said.
Keeping detailed documentation of each client interaction can help strengthen an advisor’s defence against a legal claim, Calder said.
In one case, a client bought a Term 10 policy in 2017 and then moved without providing the insurer their new address, she said. The client had some cash flow issues in 2024, and the insurer issued a non-sufficient funds notification to the client’s old address and to the advisor. However, the advisor failed to notify the client, and their life insurance policy had lapsed when the client died in September.
Ideally, advisors should document all calls, texts, meetings and emails with clients, and never make assumptions about what the client knows. People may appear to understand and nod along, so use examples and document all explanations, Calder said.
Know your limits
Advisors need to know the limits of their licensing to avoid being sued for practising outside their area of expertise, Calder said. They should refer clients to an external expert, such as an accountant or a lawyer, when a client needs services beyond their licensed areas.
Advisors might also not have full knowledge of clients’ additional contributions to their registered accounts, so clients should be reminded that they are responsible for monitoring their own contribution limits, Calder added.
Report all claims
If a claim isn’t reported to the E&O insurer in a timely manner, it could impact the advisor’s coverage, Calder said. For example, some policies require advisors to notify the insurer within 60 days of a monetary or non-monetary claim.
Even an email from a client requesting a portfolio review due to poor performance should be considered a potential non-monetary claim, as it is a complaint that requests action from the advisor, Calder said.
While lawsuits are easy to identify as claims, a letter from a regulator such as CIRO about an open investigation should also be considered a claim. There’s typically nothing for an advisor to do while a regulator is investigating, but it gives the insurer time to determine how to mount a defence.
Some mistakes may not be covered
E&O insurance doesn’t cover claims from the collection, transmission, payment or transfer of funds, Margaret Mede, head of claims at Axis Capital, reminded advisors at the event.
Axis recently rejected a claim where an advisor mistakenly sent a client’s funds to a fraudster’s account.
The client told the advisor they wanted to buy a home with funds from an RRSP and a non-registered account in the summer of 2024. The advisor later received an email from someone he thought was the client, instructing him to send $195,000 to a business bank account of a numbered company instead of the client’s personal account.
The advisor complied, not realizing that the email address was slightly misspelled.
While such cases aren’t covered under the E&O policy, the insurer will usually refer the advisor to other resources, Mede said.