CSA introduces revised version of client-focused reforms

Securities regulators are introducing fundamental reforms that — at their heart — aim to improve client-advisor relationships by ensuring that clients’ interests come first.

The Canadian Securities Administrators (CSA) on Thursday published a revised version of their client-focused reforms that, pending ministerial approval, would come into force by the end of the year. Firms will have a couple of years to come into full compliance with the requirements.

Among other things, the rules would explicitly require firms to resolve material conflicts of interest in the best interest of their clients, and to put their clients’ interests first when determining suitability.

“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 investment advice and trade in securities,” the CSA said.

Additionally, the reforms aim to codify certain best practices when it comes to know-your-client (KYC) and know-your-product (KYP) obligations, as well as client disclosure.

“The reforms are expected to increase investor confidence in the industry by better aligning industry conduct with investors’ expectations,” the regulators said.

“Taken together, these changes mean better protection for retail investors across Canada, and a high and uniform standard of conduct for all registrants. Both investors and the industry as a whole will benefit from these new requirements,” said Louis Morisset, chair of the CSA and president and CEO of the Autorité des marchés financiers (AMF), in a statement.

For dealers that belong to self-regulatory organizations, such as investment dealers and fund dealers, the SROs will be proposing their own reforms to adhere to the CSA’s proposed new requirements, enabling the regulators to exempt SRO dealers from the CSA’s rules — as happened when implementing the client relationship model (CRM) reforms.

In a statement, the Investment Industry Regulatory Organization of Canada (IIROC) confirmed that it will revise its rules to “ensure alignment” with the CSA’s proposals, “without creating unnecessary duplication or regulatory burden.”

IIROC also said it plans to have its amendments in force to meet the CSA’s planned transition period.

The CSA’s reforms would come into force throughout the country on Dec. 31 of this year, although actual compliance would be subject to a phased transition period.

The reforms relating to conflicts of interest and relationship disclosure would take effect at the end of 2020; the other changes would take effect by the end of 2021.

The CSA first published the proposals back in June 2018. After undergoing an extensive comment process, they have been significantly revised to reflect the feedback regulators received in an effort to find the proper balance between dealing with the regulators’ investor protection concerns without adding excessive compliance costs on the industry.

Some of the major changes to the CSA’s original proposals include scrapping prescriptive restrictions on referral arrangements, adding a “materiality” qualifier to the conflict of interest provisions, and providing scope in the rules and guidance for firms to scale the reforms to their specific businesses.

The CSA says the changes are designed to “provide flexibility for registrants to comply with their obligations in a way that reflects their business models and their clients’ needs and objectives.”

The regulators also say that they will be establishing an implementation committee to help guide the industry in implementing the changes.