challenge-obstacle / francescoch

This article appears in the Mid-November 2020 issue of Investment ExecutiveSubscribe to the print edition, read the digital edition or read the articles online.

Due to pandemic-related challenges, the Canadian Securities Administrators’ (CSA) client-focused reforms (CFRs) won’t be in full effect until Dec. 31, 2021.

In April, the CSA pushed back the implementation date for the CFRs’ conflict-of-interest provisions to June 30, 2021. The CSA also postponed the implementation of new relationship disclosure, know-your-product (KYP) and suitability provisions to Dec. 31, 2021.

Given these extensions, investment dealers may be tempted to put off their preparations for complying with the CFRs — but the CSA advises against procrastination.

“Even though the [CFRs’] implementation has been delayed, registrants are encouraged to consider the reforms with every interaction they now have with their clients,” the CSA stated in an email to Investment Executive.

Financial advisors operating in the brokerage and dealer channels are largely in favour of the CFRs: more than 85% of survey participants in the 2020 Brokerage and Dealer Report Cards said they supported the reforms.

“The more [regulators] raise the bar, the better it is for clients,” says one advisor with ScotiaMcLeod Inc. in Ontario.

Says an advisor with Richardson GMP Ltd. in Atlantic Canada: “We need to be up front with clients and I hope [the CFRs level] the playing field. I’d like [the CFRs] to weed out some of our bad apples within this industry.”

Still, there were concerns about the “extra paperwork” the CFRs will require, as well as the potential for additional reforms.

How firms are adjusting

While extending the deadline to comply with the CFRs was helpful, many firms are beginning to think about how they’ll implement the reforms.

“Most firms had to put a pause on what they were doing for the client-focused reforms because they had to deal with business-critical and client-critical issues,” says Nick Cardinale, chief compliance officer at RBC Dominion Securities Inc. “[We have] returned our attention to the client-focused reforms. We are completing detailed self-assessments against all of the provisions and developing action plans.”

On the front lines at RBC DS, the pending CFRs aren’t yet a top priority. Cardinale says the CFRs “won’t be a pressing issue until we’re implementing and updating our policies and procedures. As [that] gets closer, we’ll open up forums and ensure advisors have access to the information they need.” RBC DS will also provide advisors with the necessary training, he says.

The overarching nature of the CFRs will pose one of the greatest compliance challenges, Cardinale notes. “Even if it’s just tweaking things,” he says, changes must be made to compliance policies, client agreements and back-office surveillance systems.

Under the CFRs’ suitability provisions, advisors will be required to consider a “reasonable range of alternatives” before recommending an investment to a client — and will have to document that work. Wayne Bolton, chief compliance officer at Edward Jones Canada, says this will be a major hurdle for both his firm and the investment industry at large.

“What is that level of documentation that you need?” Bolton asks. “You don’t want to have too little or too much. Where is that balance?”

Edward Jones is co-ordinating internally on how to implement the CFRs. Bolton says the firm also has set up “change management” teams for advisors. These teams include senior leaders from various divisions. Edward Jones also has a branch advisory group consisting of 11 financial advisors and 12 branch office administrators working to implement the CFRs, in addition to other projects.

Bolton says Edward Jones is on track to meet the CFRs’ new conflict-of-interest requirements by the end of 2020, ahead of the June 30, 2021, deadline. (Edward Jones also plans to publish a plain-language rule book by early 2021, mirroring the project that the Investment Industry Regulatory Organization of Canada plans to complete by December 2021.)

Bolton says relationship disclosure documents may be longer under the CFRs, but he anticipates these longer documents will “provide greater clarity on how suitability is determined” and a better summary of the client-advisor relationship.

Maria Jose Flores, chief compliance officer with Carte Wealth Management Inc., says she anticipates the CFRs will lead to longer-lasting relationships with clients.

Flores says Carte Wealth is trying to make its standard know-your-client (KYC) form more in-depth and interactive as a way to meet the CFR requirements. Instead of simply asking how many dependants a client has, for example, Carte Wealth will use a more conversational tone to ask questions about a client’s future plans. KYC forms and account-opening forms will be updated by the firm more frequently, she adds.

Changes to KYP rules under the CFRs will require dealers and advisors to take reasonable steps to assess, approve and monitor changes to the products on their shelves, in addition to considering reasonable alternatives. Flores says she could use a “little more” guidance on how much advisors will need to know about products that aren’t on their shelves. She adds that CFR training will be given to all advisors and their assistants at Carte Wealth.

Andrew Marsh, president and CEO of Richardson GMP, says his firm’s portfolio managers already have a fiduciary duty that goes beyond the CFRs’ standards. As a result, Richardson GMP is focusing on other elements of the CFRs, such as the standard for disclosing and managing material conflicts of interest when an account is opened.

“This is something that I think you’re going to have different perspectives on regarding what a conflict is and isn’t,” Marsh says. “Identifying our approach and managing conflict will be the biggest change.”

Marsh notes that CFR training was “a key part of our plan for 2020,” but due to the pandemic, that training now is “a key part for 2021.” The content of the reforms, he says, is consistent with how Richardson GMP has been evolving into a more client-focused business over the past decade.

“This is where the world is turning,” Marsh says. “We have an evolution of what it means to be a professional in our industry.”

Next step for the regulators

Here’s a look at how the self-regulatory organizations and the Canadian Securities Administrators are preparing to implement the client-focused reforms (CFRs).

Investment Industry Regulatory Organization of Canada (IIROC)

Irene Winel, IIROC’s senior vice-president of member regulation and strategy, says the self-regulatory organization is working on amending its rules to align with the CFRs: “The hope is to publish our amendments for comment before the end of the year.”

Winel adds that IIROC has synchronized the rollout of its plain-language rule book with the new implementation dates for the CFRs “so firms can prepare appropriately and efficiently for the implementation of both of these important initiatives.”

Winel says IIROC plans to use tools such as webcasts to communicate with registrants about implementing the CFRs.

Mutual Fund Dealers Association of Canada (MFDA)

Paige Ward, general counsel, corporate secretary and vice-president of policy with the MFDA, says the MFDA is revising staff notices on know-your-client, know-your-product, suitability, relationship disclosure and conflicts of interest to provide additional guidance regarding the CFRs. She adds that the MFDA plans to co-ordinate the publication of these notices “with IIROC and the CSA.”

Ward says that the MFDA has received “specific questions from members in respect of various aspects of the CFRs” and has presented those questions to the CSA’s CFR implementation working group.

Canadian Securities Administrators (CSA)

A CSA spokesperson wrote in an email to Investment Executive that the CSA’s CFR implementation committee has “received great feedback [on the CFRs] from industry so far.”

The CSA published a CFR FAQ page in late September, which was shared widely by provincial regulators through “co-ordinated email blasts to registrants.”

The CSA stated the CFRs will “require registrants to do more to clarify what clients can expect from them,” especially in relation to fees and the disclosure of any limitations on products and services that are available.

The CSA also noted that it wants to be flexible when possible while enforcing “a high and uniform standard of conduct for all registrants.”

How we did it this year

Like the regulators, Investment Executive (IE) had to adjust its operations over the past year due to the Covid-19 pandemic. Instead of conducting our annual sentiment survey with compliance officers as we normally do, we spoke with regulatory staff to get a sense of the year’s developments.