Solutions for Client-Focused Reforms


With the recent publishing of new Client-Focused Reform regulation, advisors and dealers are challenged with a new compliance obligation.  Our IE article this month provides some background on the reg and strategies to remain compliant.

With the recent publication of new client-focused reforms (CFRs) on Oct. 3, advisors may be considering how they will meet yet another regulatory challenge in their practice. While this column won’t provide a detailed summary of the reforms, it will provide an overview of what the CFRs are and offer some compliance strategies.

The overarching theme of the CFRs is to “increase investor confidence in the industry by better aligning industry conduct with investors’ expectations” according to the Canadian Securities Administrators. The reforms are designed to codify best practices in our industry and to provide additional guidance on existing regulations.

With a focus on putting the client’s interest first, there are notable changes to existing know-your-client (KYC) and know-your-product (KYP) regulations. Specific changes to KYC include an expanded list of information to be gathered and updated throughout the client-advisor relationships, including personal circumstances, investment knowledge, risk profile and investment time horizon.

The new KYP standards expect both dealers and advisors to take reasonable steps to assess, approve and monitor the securities made available to clients. These assessments must consider relevant aspects of the securities, including (but not limited to) product features, risk and cost.

Combining these changes to KYC and KYP is intended to support an enhanced suitability standard. Other suitability changes include monitoring the concentration and liquidity of securities within a client’s portfolio, the cost of recommended securities and the impact on client returns, as well as understanding the appropriate range of alternatives available to the client from the dealer.

While these changes may present a new challenge to some dealers and advisors, it is important to note that the published reforms are less onerous than what was originally tabled by the CSA during the industry consultation period last year.

What strategies can dealers and advisors employ to meet these new standards and ultimately serve the best interest of their clients? I believe there are two critical steps in this process. The first is to gain a thorough understanding of the reforms and their implementation period (various aspects of the CFRs will be implemented in the next two years, ending Dec. 21, 2021). The second is to evaluate and implement technology solutions designed to ensure compliance.

In recent columns, I’ve written about the hybrid advisor model – one that combines human advice and relationship-building with best-in-class technology that supports a long-term, professional advisor-client partnership. The new CFRs reinforce the importance of pursuing this hybrid strategy.

Many dealers are actively evaluating and implementing digital client onboarding and KYC platforms that will both ensure compliance and create a smoother client experience. Advisors will be required to collect more KYC data more frequently and integrate this data into a KYP and suitability framework. The only practical solution to meet this requirement at scale will be technology-based.

Looking at both existing and new KYP obligations, technology once again will come to the rescue. In the first five weeks of 2019, over 2,000 KYP changes were made on a weekly basis to Canadian mutual funds, according to our analysis of industry data. InvestorCOM recently worked with a dealer client that has more than 50,000 products on their shelf – and they are not unique in terms of size and diversity of product offerings. Understanding and monitoring the key features of securities, including risk, cost and performance, is virtually impossible for even an army of people to manage. The dealer and advisor must arm themselves with the right technology solution to proactively meet this KYP obligation.

Combining KYC and KYP data feeds into the suitability assessment process. The complexity associated with the high volume of investment products combined with naturally evolving client KYC data and the increasing velocity of KYP product changes is a daunting task even for the most sophisticated applications. Technology providers are stepping up to the challenge. Finding the right technology partner to support your hybrid advisor strategy will ensure that you will continue to meet and exceed your obligations as the CFRs are implemented over the next two years.

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