Groups call for KYC to go beyond minimum standards

By James Langton | August 23, 2021 | Last updated on August 23, 2021
3 min read

New guidance on know-your-client and suitability processes should be expanded to include data on dependants, heightened guidance on risk and clients’ preferences when it comes to responsible investments, submissions to an industry consultation say.

In response to the Investment Industry Regulatory Organization of Canada’s consultation on the KYC and suitability components of the client-focused reforms (CFRs), the Canadian Advocacy Council of CFA Societies recommended several additional items.

Dealers should be expected to consider data on dependants and clients’ potential vulnerabilities, CAC said in its submission, and called for additional guidance around account-type suitability and the requirement to consider a “reasonable range” of alternatives.

“We believe that the proposed guidance would benefit from additional specificity regarding the KYC information to be collected as it relates to the suitability determination, as it currently may have the unintended result of encouraging the gathering of client information simply as a compliance exercise,” the CAC said.

Seniors advocacy group CARP also called on IIROC to go further than the minimum standards imposed by the CFRs, saying that it “fully supports any initiative that would move IIROC KYC and investment suitability standards closer to the creation of making financial advice-giving a true profession.”

Among other things, CARP called for heightened guidance around risk, the use of leverage and complaint processes.

Last week, the Responsible Investment Association (RIA) called for advisors and firms to make responsible investing concepts part of the KYC process. IIROC’s proposed guidance represents an opportunity to help close the gap between the number of Canadian investors who say they’re interested in responsible investing and the number who ultimately buy the products, the RIA said.

The RIA’s stance was echoed in a submission from Morningstar Research Inc., which also said that investors’ ESG preferences should be captured as part of the basic KYC process.

“If the intent of the client-focused reforms is indeed to put the client’s interests first, then a complete investor profile would include their desire to invest in line with their values and beliefs and intention to invest sustainably,” it said in its submission.

Additionally, the firm noted that ESG risks “can often be financially material,” and so taking them into account would be prudent, particularly for clients with sustainable investing preferences, Morningstar said.

Finally, it noted that research shows that retail investors who align their portfolios with their personal values are more likely to stay invested in rough markets, leading to better outcomes in the long term.

“This was observed in Canada during the Covid-19 pandemic sell-off in March,” it said. “We believe that capturing a client’s preference toward responsible or sustainable investments would be of no detriment to the investor, would allow for a more meaningful relationship between the client and the advisor, and would further encourage capital flow into sustainable projects in the future.”

Industry trade group the Investment Industry Association of Canada outlined its own set of concerns with the proposed guidance, including sections where it worried that additional requirements are being imposed thorough guidance, and areas where IIROC’s expectations may deviate from the Canadian Securities Administrators’.

IIAC detailed several areas where it believes the proposed guidance needs “additional clarification” or where differences from the CSA’s approach “should be harmonized.”

For instance the IIAC said that guidance on keeping KYC information current “appears to be imposing new KYC requirements for [discount brokerage] accounts and carrying brokers” as it doesn’t differentiate between these sorts of dealers and full-service firms.

It also said that IIROC appears to be taking a different approach from the CSA when it comes to assessing suitability on a combined basis for multiple accounts.

While the CSA allows dealers to conduct suitability assessments for multiple accounts on a household basis, the IIROC guidance takes a more limiting approach, the IIAC said.

“The IIAC is of the view that it is overly restrictive to require a client to be the same individual for all accounts in order to conduct suitability on a combined basis,” it said in its submission.

The KYC and suitability provisions of the CFRs take effect at the end of the year. The consultation on IIROC’s proposed guidance closed on Aug. 20.

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James Langton

James is a senior reporter for and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.