The Canadian Securities Administration (CSA) passed regulations (National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and Companion Policy 31-103CP) “Client Focused Reforms” (CFRs) based on the principle that in the client/advisor relationship, the client's interests come first. Among other things, this means that the products and services advisors and portfolio managers (PMs) recommend to clients must be in the clients' best interests, based on a thorough understanding of, and proof that they knew, each of their client's goals, risk profiles (the level of risk tolerance and risk capacity), objectives and more. Having been introduced in 2019, CFRs were implemented on December 31, 2021, and regulators are now conducting audits to evaluate the application of CFRs by firms and their registered advisors/PMs.
How does this translate to your firm, in practical terms? What are regulators looking for when they come to visit? Where might you be at risk of an infraction?
Keynote speaker Ellen Bessner offered a wealth of practical advice on this topic during a webcast hosted by NBIN. Ellen’s depth of perspective on the CFR rules is rooted in frontline experience. A seasoned commercial litigator, she has defended advisors/PMs and firms against allegations of compliance infractions by regulators and defended them against their clients regarding allegations of suitability and discretionary trading. She is well versed on the implications of CFRs from both the regulators’ and judges’ points of view and has written two books to help advisors and PMs navigate their compliance obligations.
This article will focus on several key concepts from her presentation, including tips to help you get audit ready.
1. Keep a High-Quality, High-Quantity Paper Trail
From in-person meetings to virtual and telephone calls, advisors have dialogue with their clients to get to know them and to monitor changes in their circumstances, values, and more (see the next section for more on this topic). If you have not done so already, get into the habit of taking notes during all such conversations. Otherwise, you are putting yourself at risk.
“Documentation, under Client Focused Reform, is the law,” said Ellen. “You need to make sure that you drill down and prepare what I have always referred to as contemporaneous notes – notes taken at the same time that your client is telling you what they’re telling you.”
By documenting conversations in real time, you are protecting your reputation, livelihood, and license. For example,
- Should you be the subject of a regulatory audit, it is not enough to say what you have done; you must prove it . “It is an infraction under Client Focused Reform if you do not have documentation to support each item on your KYC (Know Your Client) forms, and if you do not have notes to support all updates and instructions that you receive,” said Ellen.
- If a client commenced legal action against you, it is not enough to rely on oral testimony alone; your case will require documentation to support your position.
What is the best way to capture notes? Ideally, type them directly into your CRM, if you have one, or type or write the notes longhand and then scan them in. (Of course, check your dealer’s policy manual and follow any mandatory processes.)
How will you know if your notes are up to scratch from a regulatory perspective? Follow Ellen’s 5Cs of notetaking: your notes should be Contemporaneous, Correct, Complete, Current and Consistent. To learn more, check out her recent article for Investment Executive, “Pass compliance audits and win credibility with the 5Cs.”
Ellen offered a piece of advice on the last “C”: Consistent. She said that regulators who are conducting audits under CRMs are looking "...not just at the notes, but to make sure the notes are supportive of the decisions made both in the KYC and for the suitability decisions." Here is how to test for yourselves to see if your notes are consistent:
Choose five clients at random and read your notes for each one. Then, based only on what you have read in the notes, guess what should be on the KYC form. If your guess and the actual form align, you are in good shape.
A final word on great notes: they are great for client relationships. You will be able to quickly see the context of past conversations, and pinpoint what to follow up on, whether it is a change in their investments or even a personal detail, such as a family milestone. “It will help you remember the nuances and the details,” said Ellen.
2. Be Curious
You have the responsibility to act in the best interests of your clients. The better you know them, the more informed your advice will be about suitable investments. So, be curious!
“Part of knowing your clients is knowing what they’re doing and why," said Ellen. “You want to professionally assess, through dialogue with your clients, whether or not it is appropriate to change their KYC factors.”
Of course, keeping your KYC forms up to date is a given, but you may have opportunities to build stronger relationships with your clients by gaining a deeper understanding of their circumstances.
As an example, let’s say that a client notifies you about a change of address. There are a couple of options for how to respond: 1) Send them a form to fill out the new address; 2) Contact the client and have a conversation before making the appropriate updates.
Option 2 has important advantages, said Ellen. For example, what if the notification is not real; if, in fact, your client is a victim of fraud? This is happening more often, and you will be protecting your client by confirming that the change is legitimate.
If you confirm that the change of address is real, ask your client questions to understand the reason behind it. Depending on her age, for instance, perhaps she is having health issues and is moving to supportive living. Conversely, her experiences during the pandemic may have prompted her to upsize so that she can have more space. There are many possibilities, but the point is that the reasons behind the change could indicate an evolution in the client’s values or financial situation. It is not about being nosey; you simply will not know unless you ask. And your client will appreciate that you are taking the time to understand the context.
"In all of your communication, with all of your clients, you want to listen to what I call 'nuances,'" said Ellen. “Go and drill down into what the client’s values actually are.”
3. How to Manage a Client Who Rejects Your Advice
Ideally your clients have chosen you for a reason: they trust your expertise. However, there may BE one or two who want to make changes that you deem, in your professional opinion, to be unsuitable for them, such as moving all their securities into GICs or vice versa.
There are three steps to take in this type of situation, each of which is outlined in the National Instrument 31-103, subsection 13.3 (2.1). In summary, they are:
1) Explain to the client your analysis of why the action is unsuitable;
2) Share your recommendation for an alternative action that is suitable; AND
3) If the client is adamant, they leave you with no choice. Confirm in writing their instructions on which you are proceeding and confirm in writing what you did in points 1 and 2.
Know that you can refuse the trade and send the client away, so they do the trade elsewhere.
Find Out More
For better or worse, CFRs are here to stay. It is imperative to protect yourself and your clients by fulfilling the requirements. The good news is that you can also leverage CFRs to strengthen your relationships with your clients, as Ellen illustrated in her presentation.
Ellen has other thoughtful advice and practical tips for wealth managers. To learn more, visit her website and select “Publications”.
National Bank Independent Network (NBIN) is a division of National Bank Financial Inc. (NBF Inc.). Please note that comments included in this communication are for information purposes only. The opinions and endorsements expressed herein do not necessarily reflect those of NBIN.