REGULATORS EYE RULES TO PROTECT VULNERABLE CLIENTS FROM FINANCIAL ‘EXPLOITATION.’
‘Financial exploitation’ targeted
• As the Canada’s population ages, securities regulators across the country are eyeing rules to address “potential financial exploitation” of clients who may be vulnerable due to “diminished mental capacity.”
Under the proposed rules, unveiled Thursday, investment advisers will be required to take steps to obtain the name and contact information of a “trusted contact person” from their clients and to get written consent that they can contact that person in specified circumstances.
In addition, the rules will lay out concrete steps a dealer firm must take to place a temporary hold on a transaction if there is a reasonable belief that a vulnerable client is being financially exploited, or lacks the mental capacity to enter into the transaction.
A vulnerable client is defined by securities regulators as one who may have an illness, impairment, disability or aging process limitation that places the client at risk of financial exploitation.
Canadians 65 or older are the likeliest age group to report being the victims of financial fraud, according to a CSA study conducted in 2017. In addition, the regulators say, many older Canadians are at risk of financial abuse such as theft, misuse or underuse of funds intended for their care, or abuses of a power of attorney or other authority over the older person’s decision-making.
Advisers, due to the nature of their role, “are in a position to be among the first to recognize signs of diminished mental capacity or financial exploitation of older or vulnerable clients,” said Louis Morisset, chair of the Canadian Securities Administrators, an umbrella organization for the country’s provincial and territorial watchdogs.
“The proposed amendments increase investor protection and provide certainty and clarity to firms on how to act in these situations, while preserving client autonomy,” added Morisset, who is also chair of Quebec’s Autorité des marchés financier.
The proposals were developed by securities regulators across Canada, as well as two industry self- regulatory organizations: the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada.
They will be subject to a comment period running through June 3, and are expected to come into force at the same time as a series of enhanced “client- focused reforms” aimed at stepping up advisers’ knowledge of their clients’ circumstances, expectations and financial experience.
Andrea Zviedris, a spokesperson for IIROC, said the primary focus of the proposed rules is to protect vulnerable clients from third parties, including someone they might know.
“This allows advisers — who are oftentimes close to their clients — to react appropriately if there is a reasonable belief that there may be financial exploitation,” she said.
Protections for seniors have also been on the agenda of the federal government recently.
In December, the Liberals appointed a minister of seniors with a mandate that includes tackling elder abuse and ensuring that planned enhancements to consumer protection “respond to the unique needs of seniors.”
In another initiative aimed at protecting seniors in the financial realm, the Ontario Securities Commission proposed new restrictions last month that would prohibit the sale of term mutual funds that carry large penalties if cashed early to anyone 60 and over.
Ken Kivenko, an investor rights advocate and former member of the Ontario Securities Commission’s Investor Advisory Panel, said the new investment industry rules aimed at protecting seniors could work in tandem with other investor protection reforms to improve the system.
But he said the industry is likely to continue to operate with an underlying need for investors to remain vigilant about their own interests.
“Maybe the ‘ trusted contact’ approach will catch suspicious activity faster,” Kivenko said. “But with no fiduciary duty (for advisers), abusive complaint handling, lax enforcement … and an OBSI ( Ombudsman for Banking Services and Investments) without a binding decision mandate, the situation is still caveat emptor.”
He added that, at times, it is the investment industry itself that appears to be taking advantage of the vulnerable.
“Let us not forget that advisers also exploit seniors and unsophisticated clients,” he said, referring to recent cases involving octogenarians and even a 90- year- old locked into long-term investments with large penalties for cashing out early.
“The harm done by industry participants is more subtle but just as punishing,” Kivenko added.
Zviedris, of IIROC, said the industry’s self- regulatory organization has “robust” rules in place aimed at protecting investors from wrongdoing by advisers, including regulation that governs conflicts of interest and supervision.
HARM DONE BY INDUSTRY PARTICIPANTS IS MORE SUBTLE.