With compliance deficiencies on the rise, regulators are expanding their use of a new tool in compliance reviews: talking directly to clients.
In a new report, the British Columbia Securities Commission (BCSC) detailed the results of the past two years of compliance reviews, which found an overall increase in shortcomings at investment firms.
The top issue for the past couple of years continued to involve client statements and reporting.
With the client-focused reforms (CFRs) now looming, some firms are still having trouble complying with the last major set of investor-protection measures — the CRM2 reforms.
“For two years in a row, we observed an increase in client statements and reporting deficiencies,” the BCSC report said, adding that “some firms continued to struggle to fully understand the current CRM2 requirements.”
For instance, the report noted that some firms failed to provide clients with annual reporting on investment costs and compensation, which was a critical element of the CRM2 reforms.
The report also found deficiencies with annual performance reporting, as well as firms that claimed it’s the client’s responsibility to ensure the accuracy of the firm’s reporting.
“Firms bear the obligation to ensure accurate reporting to clients,” the BCSC report said.
Additionally, the BCSC found that some firms “had difficulty understanding when the relationship with their clients ceased to be transactional in nature, and became ongoing, with the requirement of continuous client reporting.”
After client reporting, other top weaknesses included advertising and marketing, compliance policies and procedures and KYC/suitability issues.
Looking ahead, the report indicated that the BCSC will continue to focus its compliance review work on these top deficiencies, along with conflicts of interest and firms’ treatment of senior clients.
At the same time, the regulator will also step up its use of client interviews as part of the compliance exam process.
Historically, the BCSC has only contacted clients in “exceptional cases,” but it has “found that client contact can be a valuable method of assessing the firm’s compliance with BC securities law.”
As a result, the BCSC will now be contacting clients more routinely as part of its compliance reviews.
“Clients may be asked a variety of questions regarding their experience with their registered firm and representative, including such things as the accuracy of KYC information the firm has about them and investment recommendations and advice provided to them,” the report said.
The BCSC also noted that the CFRs will start to take effect this year — raising the bar on firms, particularly when it comes to handling conflicts of interest and prioritizing clients.
“These new rules will result in a higher standard of conduct for firms and the individuals that work for them,” said Mark Wang, director of capital markets regulation at the BCSC, in a release.