How Client-Focused Reforms will affect you

The reforms are amendments to National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations and Companion Policy 31-103CP.

Read the news release.

The Canadian Securities Administrators (CSA)Canadian Securities Administrators (CSA) The Canadian Securities Administrators (CSA) is an umbrella organization of Canada’s provincial and territorial securities regulators whose objective is to improve, coordinate and harmonize regulation of the Canadian capital markets+ read full definition, which includes the Ontario Securities CommissionOntario Securities Commission An independent Crown corporation that is responsible for regulating the capital markets in Ontario. Its mandate is to provide protection to investors from unfair, improper or fraudulent practices, to foster fair and efficient capital markets and confidence in capital markets, and to contribute to the stability of the financial system and the reduction of systemic…+ read full definition (OSCOSC See Ontario Securities Commission.+ read full definition), recently published rule amendments to implement the Client-Focused Reforms across Canada. These reforms are based on the fundamental concept that clients’ interests come first in their dealings with firms and individuals that are registered to give investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition advice and tradeTrade The process where one person or party buys an investment from another.+ read full definition in securities (registrants).

In a nutshell

Once these changes take effect, your dealer or adviser firm and its registered individuals will be required to put your interests first when recommending or choosing investments for you. If there is a material conflict of interest, they must address it in your best interest. They will also need to do more to clarify what you can expect from them in terms of products and services. For example, they will need to provide you with more information about any limits on the products they are able to offer, and the costs and risks associated with them.

Best interest principle embedded in the reforms

With the adoption of the reforms, registrants must now address material conflicts of interest in the best interest of the client, and must put the client’s interest first when determining the suitability of investments.

The introduction of client-first principles to the suitability determination obligation and the conflict of interest provisions is expected to significantly enhance investor protection.  All registrants will become subject to a standard of conduct that many clients think already applies to them.

Additional reforms support best interest principle

The rule changes also include explicit requirements relating to registrants’ obligation to ‘know your product’. This means that registrants must take reasonable steps to understand the securities that they purchase, sell or recommend to a client, including the impact of the initial and ongoing costs associated with acquiring and holding each security, sufficient to enable them to make a suitability determination that puts the client’s interests first.

The ‘know your client’ information that must be collected by registrants has also been expanded in order for them to understand their clients well enough to meet their suitability determination obligations. These changes are intended to result in better investment portfolios for clients.

In addition, there are enhancements to the information about the client-registrantRegistrant A person or company that is registered with the securities regulator in the province or territory where they do business. They must be registered before they can legally sell securities or offering investment advice.+ read full definition relationship that registrants must provide to clients when they open accounts, so that clients will have a better understanding of the scope of products and services that a registrant will provide to them. The new requirements include providing information about potentially significant restrictions on what will be made available to a client, investing costs (including compounding effects) and any limitations relating to the products and services offered to them (for example, if a client will only be offered proprietary products).

There are also new provisions that expressly prohibit a registrant from holding themselves out in a way that could mislead clients about such things as the products or services they are offered, or a registrant’s qualifications or proficiency. This includes prohibitions on sales-based titles and the use of titles such as “vice-president” by individual registrants who do not actually function as such under corporate law.

The same standards for all registrants

The Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA) worked with the Canadian securities regulators in developing the Client-Focused Reforms and will amend the rules for their members to align with them. The reforms will be implemented on the same schedule by the Canadian securities regulators, IIROC and the MFDA.

Taken together, the reforms are intended to result in a new, higher standard of conduct across all categories of registered dealer and registered adviser, to the benefit of their clients (and, ultimately, registrants, too, as investor confidence improves).

When will these changes actually impact retail investors?

The Client-Focused Reforms are still subject to approval by the Ontario Minister of Finance, as well as governments in some other Canadian jurisdictions. If approved, the reforms come into force across Canada on December 31, 2019. This will be followed by a two-year phased transition period, with the reforms relating to conflicts of interest and relationship disclosure taking effect on December 31, 2020, and the remaining amendments taking effect on December 31, 2021.

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