Your client refuses to disclose required financial information, preventing you from performing your KYC obligation. What do you do?
Enhanced KYC, KYP and suitability obligations are all part of CSA’s proposed targeted reforms and best interest standard. At IFIC’s annual leadership conference, a panel of two regulators and a litigator discussed the hotly debated proposals.
“There isn’t a topic that has garnered as much passion as this one,” says David Di Paolo, a partner at Borden Ladner Gervais. “It’s an ongoing sense of some frustration out in the field that, just when [advisors] think they’ve caught up, […more regulation comes] out,” he says.
Read: What the CSA’s bombshell proposals mean for you
He predicts advisors’ response to the regulatory onslaught will be to establish a smaller book — but not necessarily a smaller AUM. “Advisors may say, ‘I’m going to stick with my high-net-worth clients,’” he suggests.
Debra Foubert, director of compliance and registrant regulation at the OSC, acknowledges the proposals present challenges to the industry and its business models. But “the status quo must change,” she says, reciting a line from the proposals and outlining the regulators’ key concerns (listed in the consultation paper), which focus on client outcomes.
Not a fiduciary duty — or is it?
The proposal language is cause for concern, Di Paolo says. Although the consultation paper goes to great lengths to say the proposed best interest standard isn’t a fiduciary one, phrases such as “best interest” and “act with care” may lead judges to conclude otherwise, Di Paolo surmises. Such a judicial interpretation would have significant operational and legal consequences for dealers, including the elimination of a traditional legal defence in litigation proceedings.
If a fiduciary standard is what the regulators are really trying to achieve, then honest discussion is required, he urges.
Read: PMAC to CSA: Focus on fiduciary duty, not best interest standard
Highlighting a key reason for the proposals, Sarah Corrigall-Brown, senior legal counsel at the BCSC, says, “Conflicts must be resolved in a manner that prioritizes the interests of the client and the interests of the firm.” Although she, too, refers to the current obligations advisors have to act in good faith as well as to resolve conflicts, she says the proposals’ goal is to make those obligations clearer so firms understand expectations and enforcement is easier.
Fiduciary duty or not, it’s clear suitability is no longer enough. Advisors will have a broader responsibility to offer a range of products, says Di Paolo. That’s because advisors must determine if a security’s in the client’s best interest, not simply suitable. Further, advisors will “have to prove they’re engaged in that exercise,” he says, and dealers must have controls in place to ensure that as well. But it’s unclear how.
KYC
For KYC proposed targeted reforms, Corrigall-Brown says, “Instead of that being codified, there [should] be a gathering of [product] information as a result of a real understanding of clients’ needs.” That understanding comes, in turn, from gathering more client information.
What if clients refuse?
Advisors themselves must determine whether they have sufficient information to make a recommendation, says Foubert, and they must document that a client refuses to comply.
Corrigall-Brown also stressed documentation, adding, “Have a discussion with your client on the implications of not providing that information.” For example, explain that your advice won’t be based on all relevant information and why that matters.
Indeed, increased dialogue with clients is a desired outcome of the proposals, she says.