Newly published guidance on suitability affirms importance of personal values in defining clients' investment objectives
While there’s long been a lack of focus on ESG in conversations between most Canadians and their advisors, new guidance from the Investment Industry Regulatory Organization of Canada (IIROC) may help close that gap.
Pursuant to a consultation it launched in June, IIROC has published new guidance to help clarify its members’ suitability and Know-Your-Client (KYC) obligations, in line with guidelines from the Canadian Securities Administrators (CSA) around the Client Focused Reforms (CFRs).
The IIROC guidelines, which will take effect on December 31, cover a wide array of compliance questions including the types of KYC information that dealer firms must collect, the specific information needed for suitability determination, whether the KYC obligation is the same for all accounts, and what it means to “put the client’s interest first.”
Among the pieces of KYC information to be collected – such as a client’s financial and personal circumstances, their risk profile, their time horizon, and their investment duration – the guidance said firms must take the client’s investment objectives into account. Alongside from traditional directives like capital preservation, income generation, and capital growth, the guidance included “personal values” as a motivation to be considered.
“Dealers should provide their clients with the opportunity to express their investment needs and objectives in terms that are meaningful to them, such as saving for retirement to maintain a certain lifestyle, increasing wealth by a certain percentage in a specific number of years, investing for the purchase of a home, investing for the post-secondary education of their children, or investing in accordance with environmental, social and governance criteria or other personal preferences,” IIROC said.
The guidance also set out specific factors to be considered in determining the suitability of an investment. Aside from potential and actual impact of costs, it said registered individuals must weigh parameters like the concentration and liquidity in a client’s account. They must also consider a reasonable range of alternatives when providing recommendations to clients.
“What constitutes a reasonable range of alternatives will depend upon the circumstances, including the securities and services offered, the Registered Individual’s skill and proficiency, and the client’s particular circumstances,” IIROC said.
