CSA’s Proposed Client-Focused Reforms: KYC and KYP Guidelines

The Canadian Securities Administrators (CSA) recently proposed expanded guidelines on registrants’ obligations to act in a client’s best interests and on its proposals regarding embedded commissions. Knowledge Bureau is pleased to announce that Ian Russell, President and CEO of the Investment Industry Association of Canada (IIAC) will provide expert commentary on the matter at the Distinguished Advisor Conference November 10-14 in Quebec City.

The proposed amendments outline ways in which a registrant may tailor it’s Know Your Client (KYC) process to reflect its business model, the nature of its relationships with clients, as well as how to collect KYC information using technology. This article setout some of the details released.

Know Your Client and Your Product. Advisors will be particularly impacted by a new section 13.2.1 [Know your product] that will require a much more detailed information-collection process by registrants, in order to better determine investment suitability with a more fulsome KYC process:

  • 13.2(2)(c) — Explicitly sets out KYC information that must be collected by registrants to understand their clients well enough to meet their suitability determination obligations. The information required includes the client’s personal and financial circumstances, investment needs and objectives, investment knowledge, risk profile and investment time horizon.
  • 13.2(3.1) – This new subsection will require registrants to take reasonable steps to obtain clients’ confirmation of the accuracy of their KYC information, collected at account opening and when any significant change occurs.
  • 13.2(4.1) – This new subsection will specify the circumstances when a client’s KYC information must be reviewed and updated, including when the registrant knows, or reasonably ought to know, of a significant change in a client’s KYC information and, in any event, at minimum intervals of:
    • 12 months for managed accounts
    • 12 months prior to making a trade or recommendation for exempt market dealers
    • 36 months for other accounts

The CSA is considering a phased implementation schedule for the final amendments:

  • Referrals: immediately upon coming into force, except three years to bring pre-existing arrangements into conformity;
  • Relationship Disclosure Information (RDI): One year to provide publicly available information under new requirement; two years for the other new requirements;
  • KYC, KYP, Suitability and Conflicts of Interest: Two years.

The news has received mixed reviews, particularly because on the same day, CSA Staff Notice 81-330 Status Report on Consultation on Embedded Commissions and Next Steps, was released. In that document, the CSA announced its policy decision on mutual fund embedded commissions, which was essentially to allow them. This has not sat well with some critics of the industry.

The CSA’s policy decision in this regard has three components. The first is integrated into the proposal on Client-Focused Reforms, to require registrants to address conflicts of interest in the best interest of the client, including conflicts of interest associated with embedded commissions and other third-party compensation. The CSA says it will address the other two components with a publication of rule proposals for comment in September 2018. It intends to prohibit:

  • All forms of the deferred sales charge option, including low-load options and their associated upfront commissions; and
  • The payment of trailing commissions to dealers who do not make a suitability determination.

For those who wish to make comment, feedback must be submitted in writing on or before October 19, 2018. Those who are not submitting by email should send a CD containing the submissions (in Microsoft Word format).

Address the submission to your local CSA as follows:

British Columbia Securities Commission
Alberta Securities Commission
Financial and Consumer Affairs Authority of Saskatchewan
Manitoba Securities Commission
Ontario Securities Commission
Autorité des marchés financiers
Financial and Consumer Services Commission of New Brunswick
Superintendent of Securities, Department of Justice and Public Safety, Prince Edward Island
Nova Scotia Securities Commission
Securities Commission of Newfoundland and Labrador
Registrar of Securities, Northwest Territories
Registrar of Securities, Yukon Territory
Superintendent of Securities, Nunavut

But deliver your comments only using one of the addresses below, for distribution to the other participating CSA members.

The Secretary
Ontario Securities Commission
20 Queen Street West
22nd Floor, Box 55
Toronto, Ontario M5H 3S8
Fax: 416-593-2318
comments@osc.gov.on.ca
Me Anne-Marie Beaudoin

Corporate Secretary
Autorité des marchés financiers
800, Square Victoria, 22e étage
C.P. 246, tour de la Bourse
Montréal (Québec) H4Z 1G3
Fax: 514-864-6381
consultation-en-cours@lautorite.qc.ca

Additional educational resources:

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. Emphasis is placed upon the use of strategies to better know your clients and approach wealth planning holistically. The Master Financial Advisor – Retirement Planning Services can also help you meet your clients’ needs, including in securing retirement income needed for future financial security.

If you prefer instructor-led strategic education, plan to attend the Distinguished Advisor Conference, which will be held in Quebec City, November 10-14.

CE/CPD credits are earned for completing both options, and free course trials are available.

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 the Right Tax Moves and Be Audit-Proof, Too.  Follow her on twitter @evelynjacks

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