Suitability rules should go further, says pro-investor group

Response to MFDA consultation urges changes to client risk profiling, plain-language explanations, and incorporating TCP info

Suitability rules should go further, says pro-investor group

To properly align with the spirit of the client-focused reforms (CFRs) being instituted by the Canadian Securities Administrators (CSA), mutual fund dealers will have to be held to higher standards on risk profiling, client onboarding, and other areas surrounding suitability, according to an investor advocacy group.

In its response to the Mutual Fund Dealers Association of Canada’s (MFDA) recently concluded consultation on CFR conforming changes to MSN-0069 (Suitability), Kenmar Associates called for a more comprehensive focus on client risk profiling. Aside from being supported by processes that are robust and approved by management, it said the profile should take into consideration risk need – that is, the amount of investment risk a client “must” take to reach their stated financial objectives.

“[W]e recommended that leveraging be subject to risk need analysis,” Kenmar said, noting how the practice weakens risk capacity and has destroyed significant wealth among many retail investors. “If the analysis determines that no leveraging risk is needed, the client should be informed so he/she can decide to leverage or not.”

To help ensure clients are always within their recommended asset allocation, the pro-investor group also encouraged the MFDA to require firms to implement at least a high-level validation after significant market fluctuations to properly rebalance portfolios and help manage risks.

“[C]ontinuous monitoring is unquestionably what retail investors expect is currently being done, so it is not inappropriate that the regulatory obligations and wealth management industry practice standards address this identified gap in expectations,” Kenmar said.

It also called on the MFDA to require representatives to tell new clients, upfront and in plain language, why providing correct information in the NAAF/KYC form is important, particularly as it could be used to assess complaints in the future.

“The NAAF is improperly completed, often in haste with little discussion,” Kenmar said.
Investors ought to be warned just how important every response and tick mark is when they first open an account.”

The KYC database, Kenmar maintained, should include information on trusted contact persons (TCPs) as well as dependents. To help detect misunderstandings early and prevent future client dissatisfaction, it also recommended that clients be furnished with date-stamped copies of their completed KYC information form, as well as subsequent forms updating their KYC information.

Kenmar also took the opportunity to encourage the MFDA, as well as the CSA, to accelerate the effort toward enhanced client cost reporting (CRM3). The MFDA’s suitability requirements under MSN-0069, it added, should also address the client complaint handling process that firms implement.

“Client complaint handling deals with treating clients fairly when unsuitable recommendations have been made,” Kenmar said. “It is not sufficient for the MFDA to articulate the process for suitability determination without dealing with the process relating to suitability determination process failures.”


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