Canadian securities dealers need to do a better job of treating clients like individuals, according to compliance reviews carried out by the Investment Industry Regulatory Organization of Canada (IIROC).
IIROC published its Annual Consolidated Compliance Report on Tuesday, setting out its compliance priorities for the year ahead, and reviewing the results of some of the compliance activities it carried out in 2014. With the implementation of the Client Relationship Model (CRM) reforms taking place over the past couple of years, dealer compliance with those requirements features prominently in the report.
For instance, IIROC notes that it carried out a targeted review of the Relationship Disclosure (RD) documents provided by firms as part of the first wave of CRM reforms, which found that many firms are using the same documents for different types of client accounts, including advisory accounts, order-execution service accounts and managed accounts.
The regulator says that it will work to reinforce the requirement that dealers must provide clients with a meaningful relationship disclosure document. “In order to achieve the goal of better informing clients, the RD should, at the very least, be tailored to the client account type,” it says, noting that disclosure that is not account-specific “may mislead or confuse clients by providing them with information that is not relevant or applicable to their account type(s).”
Additionally, it says that its review found “wide variation … in terms of the quality and depth of the discussion of the suitability assessment methodology, as well as the discussion and disclosure of conflicts of interest” in these documents.
“The discussion of the suitability assessment should, at a minimum, include a description of the different KYC factors and an explanation of how they are taken into consideration, individually and combined, in assessing overall suitability,” it says, adding that the suitability assessment methodology should be explained in plain language.
Additionally, IIROC reports that a review of firms’ KYC information collection processes found that some dealers “were not collecting precise KYC information but rather, were assigning clients to one of a small number of investor profiles, based on general client information collected.” It also found variation in the depth and quality of information collected regarding the client’s investment objectives, investment time horizon and risk tolerance.
Looking forward
In the year ahead, IIROC says that its compliance department will be reviewing firms adherence to new fee disclosure requirements, which represent the first elements of the so-called CRM2 reforms that are being implemented over the next couple of years to enhance investor understanding of investment cost and performance reporting. Its’ examiners will be reviewing firms’ policies and procedures regarding this requirement, as well as reviewing audit trail materials to confirm that the required fee disclosures are being provided to clients, it says.
IIROC is also planning to conduct a review of the use of business titles and financial designations by reps. It says that its examiners will be reviewing dealers’ policies and procedures “to determine whether issues relating to the use of business titles and financial designations are adequately addressed in the context of the firm’s business model and account offerings.” And, it plans to pay particular attention to titled intended to convey an expertise in senior-related issues or retirement planning, “to ensure that any individual claiming such expertise is appropriately qualified and competent.”
The regulator is also going to review firms’ policies and procedures and other documentation pertaining to conflict of interest management. And, it plans to look at firms’ social media policies and procedures as part of the next examination cycle. “The focus will include an analysis of the ways in which social media is being used by the [dealers and their reps], as well as the processes that [dealers] have implemented to monitor and control the use of social media by their staff.”
Other major issues include cyber security and seniors-related issues, along with various trading and financial operations issues.
“This comprehensive report underscores our commitment to transparency and high industry standards and signals our compliance priorities for the coming year,” said Andrew Kriegler, IIROC’s president and CEO. “As a public interest regulator, we are focused on protecting investors, while allowing IIROC-regulated firms flexibility in implementation.”
“We encourage IIROC dealers to leverage this important resource to strengthen their oversight and day-to-day compliance and risk management practices,” he added.