Protecting Investors’ Best Interests: It’s Been a Long Journey

On June 21st the Canadian Securities Administrators (CSA) released a harmonized set of proposals that requires investment industry representatives (registrants) to promote the best interests of their clients and put them first, to improve client outcomes. It’s something most clients would expect of their professional advisors; yet there are several investor protection concerns to address.

The CSA, the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) – together known as the SROs – have committed themselves to these new reforms. By way of background, this all began close to a decade ago with National Instrument (NI) 31-103, which came into force on September 28, 2009 and introduced a harmonized, streamlined and modernized national registration regime.

The Proposed Amendments were developed after an extensive consultation process, beginning with the publication on October 25, 2012, of CSA Consultation Paper 33-403 The Standard of Conduct for Advisers and Dealers: Exploring the Appropriateness of Introducing a Statutory Best Interest Duty When Advice is Provided to Retail Clients (CP 33-403). After publishing a status report, the follow up, CP 33-404, was published on April 28, 2016. Next came findings in CSA Staff Notice 33-319 Status Report on CSA Consultation Paper 33-404 Proposals to Enhance the Obligations of Advisers, Dealers, and Representatives Toward Their Clients (SN 33-319) on May 11, 2017. 

The CSA identified certain reform areas that should be given higher priority. After a consultation exercise with stakeholders, key concerns to be addressed:

  • Clients are not getting the value or returns they could reasonably expect from investing: in their suitability analysis, some registrants fail to consider all of the factors relevant to helping clients meet their investing goals.
  • Expectations gap: clients often have misplaced reliance on or trust in their registrants, which can result in sub-optimal investment decisions.
  • Conflicts of interest: the application of the current rules is, in many instances, less effective than intended in mitigating conflicts of interest.
  • Information asymmetry: the current regulatory framework is often less effective than intended.
  • Clients are not getting outcomes that the regulatory system is designed to give them.

As a result, clients were suffering a variety of harms. The CSA noted:

  • Research that shows financial self-interest may inappropriately influence registrants’ recommendations to clients,
  • Persistent findings in compliance reviews of inadequate KYC (Know Your Client) information collection, affecting registrants’ capacity to make sound suitability determinations for clients,
  • The persistence of suitability as a leading source of client complaints.

To address these concerns, the current Proposed Amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and to Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations — Reforms to Enhance the Client-Registrant Relationship (Client-Focused Reforms) are proposing specific changes relating to conflicts of interest and suitability:

  • Registrants must address all existing and reasonably foreseeable conflicts of interest, including conflicts resulting from compensation arrangements and incentive practices, in the best interest of the client
  • Registrants must put the client’s interest first when making suitability determinations
  • Restrictions on referral arrangements have been proposed.
  • Prohibitions on misleading marketing and advertising have been strengthened.
  • Relationship disclosure information (RDI) will have to provide information on any restrictions on the products or services a registrant makes available to a client, including situations when the registrant uses proprietary products.  What impact these restrictions have a client’s investment returns, and the potential impact of costs and charges will need to be discussed. A new requirement will require key information to be publicly available.
  • Training of representatives and maintenance of policies, procedures, controls and documentation will need to change accordingly.

Next time: Guidelines on the CSA’s Know Your Clients and Product and transitional requirements.

Evelyn Jacks is President of Knowledge Bureau, Canada’s leading national financial education institute and author of a new book in 2018: Essential Tax Facts – How to Make th Right Tax Moves and Be Audit-Proof, Too. Follow her on twitter@evelynjacks.

Additional educational resources: 

Advisors, now that you’ve brushed up on your compliance requirements, enhance your credentials online by enrolling in an online program or course, to help you prepare for the new changes. The Real Wealth Management Program, leading to the RWM certification is focused on the strategy and process required to assist clients with the accumulation, growth, preservation and transition of sustainable family wealth – after eroders like taxes, inflation and fees.

If you prefer instructor-led strategic education, plan to attend the Distinguished Advisor Conference. This will be held in Quebec City, November 10-14.  CE/CPD credits are earned for completing both options, and free course trials are available.



Refer a Friend       Research    Calculators Course Trials

U.S. Repatriation Tax Is Hitting Canadians Hard: Are Your Clients Affected?

Donald Trump’s U.S. tax reforms are having a significant spillover effect north of the border, as many individuals with private businesses in Canada are facing an enormous tax bill in the U.S. If your client base includes any corporation in which a U.S. shareholder controls at least 10 percent of the voting rights or value, you need to know the details of this punitive measure.

he one-time “repatriation” tax of 15.5 percent that is part of Trump’s Tax Cuts and Jobs Act is intended to bring back to the U.S. a portion of the billions in profits that major corporations (think Apple and Google, for example) have parked in foreign subsidiaries and in countries with lower tax rates. But it is also hitting hard many individual U.S. citizens, dual citizens and green card holders who have businesses abroad, and many of these people are longtime Canadian residents.

Any money sitting in affected corporations is being hit by this repatriation tax, and for those that are Canadian-controlled private corporations (CCPCs), the owners themselves will have to declare the money on their 2017 US personal tax return. According to a CBC article, the U.S. tax bill in these cases could easily amount to six figures, or even over $1 million, for those using a CCPC to save for retirement. And it gets worse for taxpayers who have to withdraw money from their business in order to pay a whopping repatriation tax bill (also called the “transition tax” in these cases): they will be hit by CRA on the withdrawals they make to pay the IRS.

Many business owners are literally losing sleep over this issue and some will even be forced to close their corporations—it simply won’t be worth it for these taxpayers to do business in Canada any longer. In a February 2018 article, the Financial Post cautioned that ripple effects could also be felt by Canadian start-ups seeking U.S. venture capital, where typically those investing the funds would set up a parent company north of the border. Structuring a portfolio in this way could be detrimental under this new tax regime and could contribute to a decline in Canadian innovation.

So far, there is no relief for business owners affected by this one-time, retroactive tax, other than a slight reprieve. Signed into law in December 2017, the Tax Cuts and Jobs Act initially stipulated a June 15, 2018, deadline for the first payment; however, in early June the IRS announced a last-minute extension to April 15, 2019, for the first instalment. This reprieve will buy some time for affected taxpayers as tax lawyers and advocacy groups go to bat with Congress to seek an exemption for Americans who are resident outside the U.S. and are shareholders in controlled foreign corporations.

The Financial Times reports that some nine million Americans live outside the country, but it’s difficult to say how many of them own foreign corporations and will be facing a big repatriation tax bill. Unfortunately, expatriates hold no political clout in the U.S., but the hope is that legislation will be passed to resolve this worrisome issue. In the meantime, you can be a trusted advisor and advocate for any of your clients who are affected by the repatriation tax, by staying up to date with news and changing legislative measures on this front.

Additional educational resources:

  1. As U.S. tax reforms make cross-border business issues more complex, you need to keep up with the changes and repercussions for your clients. Knowledge Bureau’s Cross Border Taxation course can help you stay abreast of this changing landscape.
  2. Year-end planning for investors and small businesses is a focus of the Fall CE Summits taking place in four cities—Winnipeg, Vancouver, Calgary and Toronto—in November 2018.
  3. Learn more about the tax issues and reforms affecting Canadian business owners at this year’s Distinguished Advisor Conference (DAC), taking place in beautiful and historic Quebec City, November 11-14, 2018. Speakers such as Dr. Jack Mintz, Kim Moody and Dean Smith address cross-border issues in an exciting, varied and information-packed agenda.


IMF Predicts Slowing Growth for Canada: What Can You Do About It?

The IMF predicts that if Canada and the U.S. fail to reach agreement on NAFTA, Canada’s competitiveness could take a serious hit, resulting in a drop of 0.4 percentage points or more in GDP. Donald Trump’s tweets about Justin Trudeau could further dampen the outlook. But, astute financial advisors can help clients meet their goals in these difficult times by staying on course.

According to CBC, the IMF lists the recent tense trade negotiations and the threat of major correction in the housing market as “significant risks.” Predicting that Canadian economic growth will slow in the near term from 3 percent last year to 2.1 percent in 2018, with another drop to 2 percent in 2019. The news gets worse the longer the forecast period, with potential growth limited to as little as 1.75 percent in the medium term due to “sluggish labour productivity growth and population aging.” Other factors playing into this overall picture are U.S. tax cuts and stronger government spending, as well as other policy changes in the U.S. under the Trump administration.

There are domestic challenges to our competitiveness as well.  As reported in last week’s Knowledge Bureau Report, the Bank of Canada is expected to raise its benchmark interest rate in July, which will put pressure on anyone carrying personal or household debt.  It could also increase the risk of a major correction in the housing market. There have already been significant slowdowns in the once-hot markets of the Greater Toronto Area (GTA) and in Metro Vancouver.  In the GTA, May home sales were down over 22 percent from last year. Metro Vancouver faced a decline of more than 35 percent in the same period.

These are serious challenges to Canada’s competitiveness on the global stage. They signal the need for a review of financial plans by advisors here at home, especially for their nervous clients. Reviewing debt management opportunities and sticking to investment plans, with a good measure of tax efficiency is the key to weathering the storm clouds gathering.

Now more than ever, it’s essential for advisors and clients to keep on top of economic change and to develop strategies to shore up your clients’ wealth. Knee-jerk reactions could secure unwanted tax liabilities or lock in irreversible losses, and strategies must address this economic uncertainty and potential decline of family wealth.

Additional educational resources:

  1. Join Knowledge Bureau in November for this year’s Distinguished Advisor Conference where Dr. Jack Mintz will address Canada’s declining competitiveness. Learn more about this can’t miss speaker session here.
  2. Knowledge Bureau’s Debt and Cash Flow Management course will show you how you can help your clients avoid the erosion of their wealth that comes with debt.
  3. Or, go one step further and learn strategies for building sustainable wealth for your clients with our Elements of Real Wealth Management course, the first step in working towards your Real Wealth Manager Enroll in any of our courses today to save on tuition before the June 15 registration deadline.



Interest and Inflation Rate Hikes Ahead? Time to Manage Real Wealth

After holding interest rates at 1.25 percent since January, the Bank of Canada appears ready for raise the rate in its next announcement, July 11, when many economists expect it to increase to 1.5 percent. This small jump could affect millions of Canadians and is an opportunity for advisors and clients to lean in and plan for change.

Interest rates are one tool at the bank’s disposal to keep inflation in check, around the 2 percent mark. Due to steady growth in the Canadian economy in recent months, plus increases in gasoline prices, inflation is at or above this targeted level.

According to a May 30 Globe and Mail article, “The odds of a July rate hike is now just shy of 80 percent, up from slightly more than 50 percent on Tuesday, according to Bloomberg’s interest rate probability tracker.”

The article goes on to speculate on the nuances of language in the central bank’s May 30 announcement as an indicator of what is to come in the next announcement, but what does all this talk of a probable interest rate hike mean for Canadians? And how can you help your clients manage in the face of rising interest rates?

  1. Your clients will need your help not only to save and plan for home ownership, but also to develop broader strategies for building wealth. An article in the May 30 KBR pointed to real estate ownership as one of the three big secrets to wealth accumulation and financial success. But rising interest rates will mean that home ownership will get tougher for Canadians to achieve, especially with new mortgage stress test rules in effect that require home owners to be able to afford a rate that is the greater of the Bank of Canada’s benchmark mortgage rate (currently 5.34 percent), or the rate negotiated by the buyer with their lender, plus two percent.
  2. Your clients will need your good counsel on debt management strategies to shore up their chances of financial success. In addition to mortgages, any form of debt will become more costly to service. Anyone carrying debt such as student loans, lines of credit, credit card debt and more will be stretched even further than they currently are.
  3. Real Wealth Management requires a solid look at the effect of taxes, inflation and fees on accumulation, growth, preservation and transition of family wealth. This framework will help you have better discussions about lifecycle changes in the context of emerging economic cycles.

Rising interest rates have a very real impact on your clients’ ability to be financially successful. Make appointments now to discuss debt loads, and forward-thinking investment strategies.  Stay tuned to KBR to stay informed and prepare for this developing trend.

Additional educational resources: You can prepare your clients for impending interest rate hikes with the debt management strategies you’ll learn in Knowledge Bureau’s Debt and Cash Flow Management course. And the Real Wealth Manager designation will give you all the tools you need to help them plan for and afford the home of their dreams—a cornerstone in a broader, more holistic approach to building wealth.