CRA Reports Progress on Service Plan as Call Times Improve, Backlogs Linger
A regulatory review of more than 100 Canadian wealth managers found that some companies have not yet updated their compliance procedures to meet new industry rules when selling investment products to clients.
In a joint statement on Wednesday, the Canadian Securities Administrators and the Canadian Investment Regulatory Organization said that while many firms have made efforts to update their compliance processes, with some even spending significant resources to meet new client and product suitability rules, other firms have not done so.
The compliance review is part of wider regulatory sweep that the CSA (the umbrella group for provincial and territorial securities regulators) and CIRO began in 2023 after the introduction of new rules known as the client-focused reforms. In 2023, the CSA and CIRO conducted a review of investment firms’ conflict-of-interest practices.
Now, regulators are looking more closely at whether investment companies have updated their compliance procedures around client risk and know-your-client, know-your-product and suitability-determination requirements. The review included responses from 105 investment fund managers, portfolio managers, restricted portfolio managers, exempt market dealers, investment dealers and mutual fund dealers.
However, unlike the earlier review, the second report did not disclose details or statistics about the percentage of investment companies that are complying with rules or those that have not updated their systems.
For know-your-client (KYC) information, for example, regulators found that “most” firms had some processes in place to collect and periodically update KYC information. However, the report also found that “many” firms lacked an adequate process to collect information about clients’ financial circumstances, as well as inadequate processes to keep client information current or to document updates.
In addition, many firms did not have sufficient information from clients about their risk tolerance and risk capacity – two different measures that examine a client’s attitude toward risk versus their ability to endure financial loss.
Some companies failed to collect information about clients’ liquidity needs, despite the importance of assessing whether a portion of a client’s assets might be required to pay for near-term expenses, the review said.
“This was especially concerning when clients were invested in securities that were illiquid or lacked redemption features,” regulators said in the report.
Other investment dealers did not adequately collect information on clients’ net financial assets, net worth and annual income.
For know-your-product (KYP) procedures, regulators found firms have taken a “range of different approaches” to fulfill KYP obligations either at the firm level, through various committees to assess and approve products for client use, or by delegating certain product obligations directly to investment advisers.
However, many firms still lacked sufficient documentation to show that the KYP assessments had been conducted, while some firms failed to document their approval of the securities that advisers can sell and had inadequate processes for monitoring securities for significant changes.
Where compliance deficiencies were found in all areas of the review, regulators required each firm to take corrective action and resolve the deficiencies within a reasonable time frame.
In some instances, regulators said the non-compliance issues were significant enough to warrant further regulatory action, but they did not say what that action involved.
This article was first reported by The Globe and Mail
