Saturday, October 24, 2020

Protecting seniors/vulnerable investors: some basics for CSA consideration


In addition to wreaking havoc on the Canadian economy at large, COVID-19 has had sudden and significant repercussions for how individuals, especially seniors, conduct their financial planning—specifically, how they approach investments and saving goals.

Many households have experienced income shocks and have burned through their cash reserves, illustrating the critical role that liquid assets play in the health of any financial plan. Other workers have experienced health challenges at the same time they’ve experienced income reductions or outright unemployment, highlighting the importance of emergency funds and factoring healthcare outlays into a total financial plan.

The pandemic’s economic side effects also have significant implications for when and how older adults relate to their investments. Not only have older workers experienced high rates of job loss , but based on previous recessions, it could take older unemployed workers a much longer time to become re-employed than younger ones. For those in or near retirement, the time for investment accounts to recover is limited. With increased longevity, savings will have to last much longer than ever before.

As for regulators, we believe the following actions would be very effective in protecting seniors/ vulnerable clients:


·         Redefine “vulnerable client” per U.K. FCA standard

·         Establish a Code for the fair treatment of vulnerable investors

·         Make researching Firm and individual registration and disciplinary history more investor-friendly and fulsome

·         Do not permit Dealing Reps to act as POA’s , executors or a beneficiary of a non-family member clients

·         Increase Representative proficiency standards re de-accumulation accounts such as RRIF’s

·         Require a KYC update period of one year for vulnerable clients

·         Introduce rules related to trusted contact persons/ temporary holds as proposed by NASAA

·         Hold Dealers accountable in cases of Off-book transactions and personal financial dealings  

·         Introduce best-in-class  dealer complaint handling rules that empathize with elderly, vulnerable clients

·         Provide objective suitability criteria for utilization of fee-based accounts

·         Add a requirement to document recommendations whenever a DSC mutual fund is recommended to an older or vulnerable client

·         Update constraints on “ Free lunch seminars” targeted at seniors/ retirees

·         Increase level of sanction if a vulnerable investor has been financially assaulted

·         Adjust sanctions based on whether or not harmed clients were fully compensated for undue losses

·         Make investor compensation a priority consideration

·         Give OBSI a binding decision mandate to eliminate low-ball settlements

·         Consider establishing a Senior’s Helpline based on the FINRA Model ( see their report  )

·         Increase cooperation with insurance regulators to reduce regulatory arbitrage

NOTE: In April 2017, FINRA (equivalent to a Canadian SRO) announced that the National Adjudicatory Council (NAC) revised FINRA’s Sanction Guidelines to include a new principal consideration titled “Consideration for Vulnerable Customers.” The NAC is FINRA’s appellate tribunal for disciplinary cases and is a 15-member committee composed of industry and non-industry members. The new principal consideration reaffirms that financial exploitation of senior and other vulnerable customers should result in strong sanctions. While FINRA’s decisions have acknowledged that exercising undue influence is an aggravating circumstance on a case-by- case basis, the new principal consideration makes clear that the Sanction Guidelines contemplate coverage for vulnerable individuals or individuals with diminished capacity. We encourage the CSA and SRO’s to take similar stands

Thursday, June 4, 2020

Access Equals Delivery (AED) –NOT SO FAST

Canadian securities regulators are contemplating implementing access equals delivery for prospectuses, financial statements and MD&A, and possibly other types of documents, including rights offering materials, proxy-related materials and bid circulars. The regualtors describes “delivery” to mean document filing on SEDAR (The System for Electronic Document Analysis and Retrieval), posting on the issuer website and issuance of a News Release. We do not believe that such a process is actually delivery. It is insufficient to protect and engage investors, and in particular retail investors and individual shareholders, absent additional measures.

National Policy 11-201 provides that “delivery” can generally be satisfied through electronic distribution, provided that the investor receives notice that the document has been, or will be, delivered electronically; the investor has easy access to the document; the document received is the same as the document delivered; and the issuer has evidence that the document has been delivered. This is reasonable.

As of 2013, the “notice and access” model of delivery set out in National Instruments 54-101 and 51-102 has applied to permit electronic delivery of proxy materials for shareholders’ meetings. This works fine – investors wanting electronic access can have it, investors wanting paper copy can have it at no charge. After all, it is investor money that is financing the Company so they should have the right to choose how they want disclosure delivered.

The key difference under the current proposed model is that nothing would need to be sent by mail.  The system relies on investors finding and accessing materials online through SEDAR and the issuer’s website. We are not aware of any way for investors to be sure that they receive these news releases in a timely manner and in a way that they can distinguish them from other news releases.  There is currently no mechanism through SEDAR by which a person might receive alerts that a SEDAR filing has been made. In other words, AED does not actually require delivery to retail investors. And yet, the regualtors cite disclosure as a cornerstone of investor protection. This mere notice and posting, without a determination of whether participants actually open the notice or access the disclosure, is not enough to be considered a measure reasonably calculated to ensure actual receipt of the disclosed material by investors.

The regualtors assert that AED is more efficient, is environmentally friendly and will save companies money via reduced mailing costs. But what about investor protection? Not everyone has access to a computer, the internet or is comfortable using the internet in seeking and utilizing financial information. Some just find it easier to read paper copy rather than off a computer screen.

Some limitations of an access equals delivery model include:

• lower utilization and engagement by those retail investors who prefer paper copies, or because emails can more easily get not noticed or forgotten;
• lower readership by investors cautious about cybersecurity concerns ;
• lower readership of important and time-sensitive documents if notifications to investors are generic and fail to provide sufficient detail regarding the nature of the document and applicable deadlines;
• potential increase in investor complaints if they are not made adequately aware of time-sensitive decision-making and if decision deadlines lapse;
• scrolling on a screen may lead to a more cursory review;
• challenges in locating disclosure documents on difficult to navigate reporting  issuer websites;
• difficulties in navigating SEDAR until the planned SEDAR overhaul is finalized; and

• low readability on phone screens by investors who primarily, or exclusively, access the internet through smart phones.

Some consequences of access equals delivery are still to be determined, such as how to address investors’ withdrawal rights (the right to withdraw from an agreement to purchase securities within two business days of receipt of the latest prospectus).  The regulators are no doubt cognizant that introducing this model for disclosure documents requiring immediate shareholder attention and participation could raise investor protection concerns and could have a negative impact on shareholder engagement. There seems to be no benefit to investors even if, as improbable as it is, any cost savings are passed on to investors.

Finally, given that an increasing number of Canadians are now responsible for managing their own retirement accounts, there is a renewed importance to effective disclosure.

A transition to a delivery system where access equals delivery will make it less likely that certain retirement savers read issuer disclosures and, as a result, these investors could make less informed investment decisions. In short, the regulators are proposing to seduce a material swath of retirement savers and retirees into a disclosure system that they didn’t ask for and which may not work well for them.

We’d like to see regulators focus more on improving the accuracy and quality of disclosures, increase use of plain language and improve financial literacy among Canadians.

Saturday, April 4, 2020

Investor Bulletin- KYC/Suitability under COVID-19

The pandemic is likely to be a life- altering event for many individual investors who might experience, among other things:

·         a loss or significant decrease in employment or business income,

·         a significant decrease in the value of their investments, and/or

·         become seriously ill

This means that the investors’ know-your-client (KYC) information could need updating. 

Portfolio holdings and/or accounts might no longer be suitable for them.

We expect risk tolerance, risk capacity, objectives and time horizon to be severely impacted for many investors.

For accounts subject to the suitability determination requirements in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (NI 31-103), Firms must:

·         take reasonable steps to keep current the investor’s KYC information before making a recommendation, accepting an investor’s instruction to buy or sell a security, or making a purchase or sale of a security for a managed account.

·         take reasonable steps to ensure that the purchase or sale of the security is suitable for the client. [Suitability standards  will further tighten up under the Client Focussed Reforms to be phased in during a two-year transition period, with the Amendments relating to KYC, suitability ,conflicts-of-interest and the associated relationship disclosure information provisions taking effect on December 31, 2020, and the remaining Amendments taking effect on December 31, 2021]..

·         consider significant changes in the portfolios as a trigger for updated KYC information.

Note: A suitability determination is not required for accounts held with discount brokers.

A Firms’ duty to update KYC information is occurring at the same time as investors and registrants are coping with the dislocations caused by quarantine measures and the shift to work-from-home arrangements.

We recommend that investors be proactive and advise the Firm of any and all changes in your personal circumstances that could impact your time horizon, risk tolerance, investment objectives, comfort with your financial plan and/or your investments. As investor’s personal circumstances change during a time of crisis, it is important that this be shared with the investment advisor.  Investors should take careful notes of all communications about your KYC information and keep those notes indefinitely.

COVID-19 or not, Firms must have policies and procedures for updating KYC information, including in situations like these where registrants have ample reason to believe that investors’ circumstances have changed, or are about to change, significantly. 

The know-your-client and suitability obligations are among the most fundamental obligations owed by registrants to their clients and are cornerstones of the investor protection regime. There is no chance that regulators will provide exemptive relief for this fundamental requirement but work-from-home creates risks for investors. Be vigilant. Control your own financial destiny or somebody else will.

Tuesday, March 24, 2020

Investment Time horizon- simple concept but…

Investment objectives are the result desired by the client from investing and should relate to the type of investments that will be purchased by the client. Be sure to articulate the time horizon in your statement of objectives. Time horizon is a critical parameter in the Know-Your-Client (KYC) process.

Time horizon is the period from now to when the client will need to access a significant portion of the money invested. It can be defined in absolute terms or in ranges that provide for a sufficient number of categories to assess the suitability of the products sold or investment strategies used. In principle, time horizon seems to be a simple concept. However, it gets tricky, because investment horizon can fluctuate based on evolving financial interests and other variables and an account can have more than one objective.

It is important to determine your time horizon before deciding what type of assets you should have in your portfolio. If you do not need your money for a long time, for example, decades, you can own a riskier mix of investments compared to a person who needs money within the next few weeks or months. Time horizon is not the only deciding factor, but it is a key one. It must be considered alongside and in concert with return expectations, cash flow needs and other factors. A longer time horizon means investors have more time to allow compounding of returns and ride through volatile markets assuming they have the financial capacity and risk tolerance to do so. During the 2008 financial crisis, many investors bailed out when markets tumbled because of fear or urgent need for cash for daily living expenses.

In many cases, an investor will have multiple goals with multiple time horizons at any given time. For example, you may have a Registered Retirement Savings Plan (RRSP) with a 30-year horizon, a Registered Education Savings Plan (RESP) for a child in grade school, and an open non-registered account to save for an upcoming vacation. You may even have multiple time horizons during retirement. You’ll need some short-term, lower-risk investments to generate income as well as longer-term higher-risk investments designed to provide growth and keep you ahead of inflation. To avoid misunderstandings, ensure your advisor understands your full time horizon profile. Be sure to update your profile as your situation changes.

Investment Firms distinguish between short-, medium- and long-term time horizons. Short-term investments are generally considered to have time horizon up to three years. The investor tends to have a low risk tolerance and should invest in guaranteed securities, such as GIC’s or high-interest savings accounts.  Medium-term investments cover the period from 3 to 10 years.

Long-term investments are more often designed to be held for 10 or more years. With this time horizon, investors typically include a higher percentage of riskier, more volatile investments. For those investors with Registered Education Savings Plans, the time horizon is the point at which the child needs to enter university. In this case it is important to update time horizon at various points prior to university entrance especially those years immediately ahead of the planned use of the funds. Think of COVID-19’s abrupt impact on an education portfolio.

It is essential to understand the time horizon definitions used by your Firm before ticking off any time horizon boxes on forms.

The majority of advisors would suggest average 30-years-old investors to have asset allocation of a portfolio more heavily weighted in equities than that of someone who is close to retirement. Investor age is not the sole determinant of the duration of time horizon. For example, a middle-aged investor wanting to save money for a down payment on a house in one year would be investing with a one-year time horizon, even though her/his retirement is years away.

Some Firms define long term time horizon as greater than 3 years, making the recommendation of a purchase of a DSC mutual fund with a 6 year redemption schedule unsuitable.   As another example, where a minimum time horizon has been established as a guideline for recommending leveraging, the time horizon on the KYC should be able to support that this criteria has been met.

A client with a long term time horizon, significant net worth, and income level may be able to withstand fluctuations in the market over the long term, which could lead to the conclusion that the client is medium to high risk or should invest a significant portion of his or her portfolio in riskier investments.  However, if the client is unwilling or unable to accept that level of risk or is not comfortable with investing in risky or volatile investments, the KYC form should reflect the client’s decision and not the advisor’s opinion of what the client’s risk profile should be.

Be realistic. If you plan to retire at age 55 this may mean you will need to
significantly more risk for the potentially higher returns. If you are
seriously ill or at an advanced age, your time horizon likely shouldn’t be long

Never sign an incomplete KYC Form: A pre-signed form may allow an unscrupulous advisor to unduly increase your time horizon. Because every investment recommendation and every investment decision is based upon information contained on the KYC forms, any inaccuracy in the information necessarily taints a recommendation or decision made based on that information. Further, the uncertainty about time horizon impairs a Firm’s ability to ensure that all recommendations are suitable for you. An incorrect time horizon can lead to unsuitable investment recommendations and undue losses. In the event of a complaint, the Firm may point to your signature and deny your claim for restitution.

Think liquidity and cash flow: Your portfolio may have multiple time horizons and it needs to provide liquidity and certainty of liquidity to meet these liabilities as and when they fall due. This is particularly important for RESP’s and for retired people drawing cash for living expenses.

Joint Accounts: For joint accounts, certain KYC information, such as age and investment knowledge, is collected for each individual account holder. Annual income and net worth are typically collected for each individual or on a combined basis, as long as it is clear which method has been used. However, Investment objectives, risk tolerance and time horizon relate to the account and not each individual. That will influence the construction of the portfolio.

Now is a good time to revalidate your time horizon(s) and other critical KYC parameters with your Firm.

Friday, March 20, 2020

Investor ALERT: When you receive a letter from your dealer....


Investors receive many documents from their investment dealers.  Not all documents are of equal importance.  INVESTORS BEWARE: some documents are Red flags and investors should review these documents with special attention and care.

The problem – Red flags

We often read something like the following in regulatory sanction decision documents:

“On November 14, 2017, the Member sent a letter with a 3-year transactional summary to all clients serviced by the Respondent. The Member requested that the clients review their transaction summaries to ensure that the trading activity was completed as directed and to report any inconsistencies by December 14, 2017. No clients have reported any concerns.”

What this text is literally saying is that no investor reported any concerns about any transactions that were made in their account. It could simply mean that investors didn’t respond or did not understand what an inconsistency means. It could be a red flag.

The above quotation, or similar wording, can also be interpreted to mean:

“We asked clients to review their transaction summaries and check that they had in fact approved these transactions and all these clients failed to raise any concerns.  As a result we interpret the investors non-response as saying, “yes, we had approved  all transactions in those summaries. “.

The investor’s dilemma

An investor cannot be sure exactly what the wording in the regulatory sanction decision document actually means.

It could mean that a recipient of such a letter from their dealer is not aware that the dealer is investigating her/his advisor or that regulators are investigating the dealer and /or advisor.

It could be the investor didn’t understand the red flag when they received this document from their dealer, or was simply too busy to respond or didn’t think it was important to respond.

It is our experience that retail investors do not fully appreciate why the dealer sent them the letter.

We anticipate that many investors will receive similar Red flag documents in the weeks, months and even years to come.  When a down market occurs, problems with advice and investment advisors are more likely to come to the attention of investment dealers and, as a result, these types of letters are more common.

Any letter received from your dealer requesting you to review your account is a huge Red flag.

When an investor receives a document like this, it is entirely reasonable to assume the dealer or regulator has uncovered some wrongdoing or suspicious acts by the advisor or the dealer.

The dealer is asking you to identify any questionable transactions and given you 30 days to spot and report them. If you don’t report anything, the dealer may assume you are comfortable with the transactions. This could be used against you in the event you file a complaint in the future.

When you receive such a letter

These types of letters should be considered as warnings that the people you trust with your nest egg have very likely done something wrong including one or more of the following things:

 Broken a dealer rule or securities regulation

 Bought or sold something without your permission

 Changed information about you ( KYC) that permitted ( and could permit future mis-selling) an unsuitable transaction

 Forged your signature on a document

The advisors’ errors or wrongdoings could have resulted in you owning an unsuitable investment, paying commissions for trades you didn’t need to make or even signing you up for an investment loan you neither want nor need. Many investors are not aware of such errors and wrongdoings.  Often the advisor’s error is explained away as “its just the markets”.  Investors should look further into the cause of their financial losses.

Recommended Investor Actions

First review all documents that suggest you may be approving past actions and decisions by your financial advisor’s action.

In effect, there has been a breach of trust. You and your investments were and may still be in harm’s way.

Not only should you carefully review your account and question the dealer directly why you have received this letter, you should also request a meeting with your advisor and their immediate supervisor.

Recommended reading : Investor’s Guide to Complaints

Saturday, March 14, 2020

ALERT: Things to do and not do in the COVID-19 investing environment

·       Update your KYC profile especially risk capacity/tolerance ;time horizon; objectives

·       Avoid being sold mutual funds based on the Fund Facts Risk rating –these ratings are flawed

·        Do not let yourself be sold DSC mutual funds- liquidity essential in turbulent times

·       Avoid “advisor” recommendations to borrow for investing

·       Establish an emergency fund or add to it if you have one 

·       Do not loan money to your “ advisor “

·        Do not effect any transactions on the side with your “ advisor”

·       Think at least twice before being sold  a “ hot” IPO  

·        Consider equity crowdfunding at your own risk and peril

·        Negotiate lower fees for advice and seek out lower cost products that meet your needs 

·        Avoid internal bank “ ombudsman “ ; escalate complaint directly to OBSI

·       Stay away from “Free lunch” educational seminars -can be bad for your financial and physical health

·       Assume your “advisor” is influenced by biased dealer compensaion ; do not assume she/he has your Best interests at heart- be constructively critical

·       Check your Account statement for unusual transactions -respond immediately to any transactions you do not understand or do not agree with.

·        Establish a Trusted Contact Person with your financial institution.

·       Ensure you have a Power of Attorney in place in case you are ill for an extended period of time

·      And last but not least , have an up-to-date will just in case the worst happens. 

Please forward to family, friends, and colleagues.

Caveat Emptor

Monday, February 24, 2020

Bank complaint system wholly inadequate, FCAC review finds

The review of Canada's Big Six banks released on Feb. 19, 2020 by the Financial Consumer Agency of Canada (FCAC) found the banks have no clear process for dealing with complaints and the average time to resolve them can take up to seven months, which is far longer than the 90-day requirement.

The review found more than five million Canadians file at least one complaint with a bank each year. It said 76 % of those "relatively simple complaints" are resolved at the first point of contact. It appears 24% go into a kind of black hole.

The review found that in general, the Senior Complaints Officers (SCOs’) reporting procedures are underdeveloped. Most could not produce or describe the steps taken to verify and ensure the accuracy of information about their activities (such as the number of complaints resolved to consumers’ satisfaction), which they are required to report publicly. FCAC found a number of inconsistencies in the SCOs’ records during the review of complaint investigation files, such as incorrect records of the date when the complaints were received at the second level. Even more shocking -most SCOs have a narrow interpretation of the reporting requirements in the Bank Act -most do not have the authority to reimburse consumers or impose settlements on business units contributing to the delays in resolving client complaints. In other words, the complaint system is unmanaged and designed to fail.

Complainants kept in the dark

More than 90% of consumers whose complaints weren't resolved satisfactorily at the first point of contact did not escalate the complaint, a troubling figure.

It also found banks' procedures are not accessible, timely or effective when it comes to cases that aren't resolved by frontline staff and that the ability to resolve more of those cases "declines significantly" when consumers escalate their complaint.

The FCAC found clients who escalate complaints "tend to experience fatigue and frustration" because of inefficient bank procedures .Lengthy delays cause clients to drop their complaints before they are resolved leaving them exposed to uncompensated losses.

Staff training 'generally inadequate' or 'totally absent'

The review found banks' procedures for handling complaints objectively "are inadequate," noting the same frontline staff who deal with them "are under pressure to make sales and control costs, and these pressures may influence their decision to reimburse the customer." This in in direct breach of  FCAC’s CG-12 Internal dispute resolution rule.

Banks are required to provide clients with brochures in their branches about their complaint-handling process. The FCAC found employees don't know when to give brochures, which in some cases do not provide clear information on escalating the complaints process and in one case contained outdated information. Based on our review , most brochures provide incorrect information as regards access to an External Complaints Body.

Long cycle time

FCAC CG-12 require banks to resolve the majority of complaints within 90 calendar days, which the review said is about 50 % longer than the standard in the U.K. and twice as long as permitted in Australia. 

FCAC guidelines don't require the 90-day clock to start until the complaint has been escalated to a bank's senior complaints officer, "which means the time consumers spend going through various steps at the first level is not counted." It points out most jurisdictions start the clock when the complaint is first submitted. This is one of many deficiencies inherent in CG-12.

The review found 4 unidentified banks take anywhere from 107 to 207 days instead of the required 90 days. Only two of the banks reviewed complied with the stipulated timeline, resolving complaints on average in 88 and 89 days, respectively . Enhanced FCAC enforcement with meaningful sanctions would quickly address this issue.

Areas for improvement

The report cited a number areas where banks must deal more effectively with complaints, such as:

1.   Implementing robust policies and procedures to ensure escalated complaints are handled consistently and effectively.

2.   Doing a much better job of monitoring, assessing and improving complaint-handling procedures.

3.   Improving employee training programs, which are currently largely informal.

4.   Ensuring complaints are resolved objectively and implementing comprehensive and well-developed  client reimbursement policies

5.   Bringing cycle time into compliance with the regulations and international standards.

Our take on the report

·        Complainants become fatigued by the complex process and unduly drop legitimate complaints against the banks

·        Complainants are being short changed in the resolution of their complaint

·        Complainants suffer collateral financial harm as a result of poor and slow complaint handling

·        There are too many stages in the bank complaint process-The internal ombudsman step should be removed

·        The banks do not provide required public statistical summary reporting as required by CG-12

·        FCAC CG- 12 is an inadequate standard for modern complaint handling

·        The FCAC needs to treat complainant exploitation and non-compliance with regulations more seriously through robust enforcement actions

·        There are non-financial impacts of poor complaint handling including emotional distress and harmful physical health issues  

·        There is no evidence that the banks use complaint information to improve products or services

It is now up to the finance minister to respond to the report and ensure client protection is improved. A time-delaying consultation is not necessary as the facts point to the required action(s).