MFDA offers CE update

Near the top of the MFDA’s list is the client-focused reforms (CFRs), which include obligations for firms and reps to put their clients’ interests before their own, and revise the rules on suitability, conflicts of interest and know-your-client procedures, among others.

The provincial regulators adopted the CFRs at the end of 2019. Next up are changes to the SRO rules. Most of the detailed requirements will be phased in over the next two years.

As with the CRM reforms, the SROs must revise their rules to ensure they conform with the requirements imposed by the CFRs — ultimately enabling firms that fall under SRO oversight to be exempt from the Canadian Securities Administrators’ (CSA) version of the rules.

At the same time, an industry working group has been deliberating potential compliance and implementation issues for the CFR requirements. Both the MFDA and IIROC are expected to be able to publish their proposed rule changes in April or May.

Proposed revisions to the SROs’ guidance are likely to follow that, and the MFDA indicates that it will revise its compliance exam program so the SRO can begin testing firms and reps for their adherence to new requirements that will take effect as part of the CFRs.

Alongside the CFRs, which are a CSA-driven initiative, one of the MFDA’s big policy efforts — one that has been in the works for the past couple of years — is the introduction of continuing education (CE) requirements.

The MFDA has passed rules to introduce CE requirements, and the provincial regulators have approved those rules. Before the framework can come into effect, however, the MFDA has to finalize its standards for accrediting CE courses and develop a reporting regime so the MFDA can track compliance.

Last year, the MFDA published a consultation paper on a proposed approach to accreditation, which contemplates outsourcing the SRO’s authority for approving CE courses. The MFDA aims to publish its accreditation standards in the next couple of months. The timing for getting its CE system up and running remains uncertain, but the MFDA hopes to have the system operational by the end of 2020.

Major projects, such as the CFRs and the CE framework, are well underway, but there are a couple of other areas in which the MFDA has its eye on possible future work. One is expanding the client reporting that was implemented as part of the CRM2 reforms to include not only the fees paid to dealers, but also management fees and other operating costs — an idea that has been called “CRM3,” but which the MFDA now refers to as “total cost” reporting.

The MFDA’s bulletin states that the SRO favours investors having complete information to inform their investing decisions.

“This year, we will continue to explore total cost reporting alternatives and collaborate with other regulators,” the MFDA bulletin states. Whether this will lead to the development of CRM3 proposals is not clear.

Another area that the MFDA has its eye on is the account-transfer process. A long-standing industry complaint is that transfers between industry firms — and particularly from one industry sector to another — often take too long to complete.

The MFDA states that delayed transfers “can have a significant impact” on clients. The SRO acknowledges that a delay may be understandable in certain circumstances — given the types of assets involved, whether they are held in client name or not, among other factors — but maintains that “there should not be unnecessary systemic obstacles that create delays.”

In the year ahead, the MFDA states, it will initiate an industry consultation to understand the transfer issue better, and will develop recommendations for improving the process and enhancing outcomes for clients.

On the compliance front, the evergreen subject of suitability will remain the top priority for the MFDA’s examiners — especially regarding vulnerable investors, such as seniors and others who may be particularly harmed by unsuitable advice.

The MFDA is continuing to ramp up its use of data to help target its compliance work. Last year, the SRO reported on a project to focus on reps with high-risk books; that project was based on client data the SRO collected in 2017.

That initiative targeted reps whose books carried certain red flags, such as a hefty concentration in risky sector funds; virtually identical KYC information throughout their client base; books with interchangeable KYC info; and many undiversified portfolios (for example, with clients invested 100% in equity funds).

In this year’s reviews, the MFDA will be looking at the steps dealers have taken to address the SRO’s original findings with their sales forces. The MFDA also will be looking at firms’ efforts to implement supervisory policies to detect similar issues in the future.

Now, armed with even more extensive data on the industry’s clients, thanks to a second major client-data collection exercise in 2019, the MFDA plans to dive even deeper to root out possible compliance issues.

In particular, the MFDA is reviewing data on client account performance for signs of irregularities or evidence of inaccurate reporting to clients.

The SRO also is looking at dealer referral arrangements amid ongoing concerns about the incentives and possible conflicts of interest that can arise as a result of these deals.

The original version of the CFRs would have addressed some of these concerns by introducing curbs on referral arrangements. However, those provisions were dropped from the final version of CFRs that was ultimately adopted by the CSA.

Still, referrals will remain under scrutiny as the MFDA undertakes its own regulatory agenda.