CFRs: 5 changes you need to know about
Arnie Hochman, Vice President, Policy and General Counsel at The Investment Funds Institute of Canada (IFIC), gives Advisors the low-down on the new client-focused reforms due to come fully into force by year-end.
July 2021
Arnie Hochman
Vice President, Policy & General Counsel, The Investment Funds Institute of Canada
Raising the bar for clients
With the Canadian Securities Administrators’ (CSA) client-focused reforms (CFRs) on track to be fully implemented by the end of 2021, change is in the air, particularly with the conflict-of-interest provisions already having taken effect in June. Both IIROC and MFDA rule changes are expected to be implemented along the same timeline. What does this mean for Advisors?
The overall goal of the CFRs is to create a new, higher standard of conduct that will put clients’ interests first. Essentially, it could be viewed as a codification and enhancement of industry best practices that many firms and Advisors may already be incorporating – from gathering detailed client information to demonstrating product comprehension, revealing potential conflicts and putting clients’ interests first.
Importantly, think about the CFRs as both substantive rules (what you can/can’t do) – and disclosure requirements. Together, they work as a whole package to closer align client and Advisor interests, which will ultimately help increase trust, and build deeper relationships in the process. So, if you’re not already, start considering the reforms with every interaction now.
They work as a whole package to closer align client and Advisor interests, which will ultimately help increase trust.
Here’s a high-level overview of 5 relevant changes, and what you need to know to be prepared for them:
- Enhanced Know-Your-Client (KYC) requirements – the goal here is to gain a better overall understanding of clients’ goals, assets, liabilities, risk profile, liquidity needs and time horizon, with a prescribed minimum timeline for updating the information through regular, meaningful conversations.
- New Know-Your-Product (KYP) rules – for the first time, Advisors are explicitly required to understand the products they recommend, which must be from a “firm-approved shelf” that must be reviewed by the firm on a regular basis. Before making a recommendation, they’ll need to demonstrate that they understood and considered a range of appropriate alternatives, and document a suitability assessment in plain language.
- Enhanced Suitability requirements - these require Advisors to put their clients' interests first, ahead of other factors such as direct or indirect remuneration, when making a suitability determination. Advisors must also consider the potential and actual impact of costs, concentration and liquidity on returns, and a reasonable range of alternative investments available at their firm. Suitability is now to be determined on an overall portfolio analysis basis, with prescribed triggering events to reassess suitability.
- Enhanced Material Conflicts of Interest provisions – already in effect but now enhanced, this is intended to ensure conflicts are identified and addressed in a manner that is in the best interest of the client. Clients must be provided with written disclosure at account opening and in a timely fashion thereafter detailing material conflicts of interest and how they are addressed in a way that puts clients’ interests first. Potential conflicts of interest include selling both proprietary and non-proprietary products, various types of remuneration and incentive plans, referral arrangements, personal financial dealings and outside business activities.
- Record Keeping and Compliance systems – to comply with the new CFRs, firms will need to review and amend procedures as necessary to implement policy changes and internal controls. Advisors will also have to maintain proper records of their investment decision-making process.
“Showing your work” will be key
These reforms will fit differently for Advisors with different business models. As a result, each investment dealer will have to adapt, and will need to identify current gaps to enhance internal controls and record-keeping processes as a means of establishing evidence of compliance. For Advisors, it’s important to “show your work” when making a recommendation such that it’s clear enough for an objective outsider to review a comparison of similar products. It’s not simply enough to comply – you have to demonstrate compliance to a reasonable third-party standard.
Check KYP Off Your List. Easily.
To help you stay ahead and save time, BMO Global Asset Management has created an easy-to-use fund comparison tool to support Advisors with the new KYP and Suitability guidelines. Our KYP tool yields customized reports that are tailored to your needs – and delivered fast.
To learn more about this new resource, contact your BMO Global Asset Management Regional Sales Representative.
Firms are expected to offer training and instruction on this front, which will be vital so there is a general understanding of the new protocols and requirements, particularly for KYP and suitability. For example, if you’re receiving direct or indirect compensation for recommending a product (both proprietary and third party), there may be a misperception that you’re suggesting it because of a compensation differential. In this type of situation, a comprehensive product review comparison will now be required to demonstrate it’s the right fit for the client. The work can also help dispel any misgivings by showing that you’ve truly considered products on your firm’s shelf. Moving forward, the expectation is a reduction in suitability-related complaints – typically the highest in volume – and more successful client outcomes as a result.
It’s not simply enough to comply – you have to demonstrate compliance to a reasonable third-party standard.
Another scenario to be addressed is the explicit disclosure of whether you’re selling only proprietary products, non-proprietary, or a combination thereof – as there’s a big potential conflict, particularly if differential compensation exists. Where only proprietary products are sold, the Advisor need only consider alternatives that are available through the firm For internal control purposes, firms could address offering only proprietary products by conducting periodic reviews of non-proprietary products and evaluating whether their products are competitive. Those Advisors with a mixed selection will need to demonstrate that both types of products are subject to the same robust KYP and selection processes and documentation. This includes letting clients know about any potential liquidity constraints.. If the client wants to cash out quickly, are they going to be able to accomplish this and, if so, will it be at a reasonable price?
The CSA has established a straightforward process for addressing questions and uncertainties, meeting regularly with industry associations and maintaining a rolling FAQ.
A continuous process
Though the new CFRs are expected to raise the general industry standard, there will no doubt be nuances for every practice. The good news is that the CSA has established a straightforward process for addressing questions and uncertainties, meeting regularly with industry associations and maintaining a rolling FAQ where new queries are added to a public forum. (The last was published March 31, 2021). IFIC also has a committee that reflects members’ questions, such as application of the new rules in particular circumstances. Like any major reform, it’s a process that will benefit from ongoing improvements, discussion, and additional guidance.
For more insights to enrich your practice, contact your BMO Global Asset Management Regional Sales Representative.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax, compliance or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp., BMO Asset Management Limited and BMO’s specialized investment management firms.
®/™Registered trade-marks/trade-mark of Bank of Montreal, used under licence.
“BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. Certain of the products and services offered under the brand name, BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).
BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing.
Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the ETF facts, fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
Distribution yields are calculated by using the most recent regular distribution, or expected distribution, (which may be based on income, dividends, return of capital, and option premiums, as applicable) and excluding additional year end distributions, and special reinvested distributions annualized for frequency, divided by current net asset value (NAV). Distributions are not guaranteed, may fluctuate and are subject to change and/or elimination. Distribution rates may change without notice (up or down) depending on market conditions and net asset value (NAV) fluctuations. The payment of distributions should not be confused with a BMO Mutual Fund’s performance, rate of return or yield. If distributions paid by a BMO Mutual Fund are greater than the performance of the investment fund, your original investment will shrink. Distributions paid as a result of capital gains realized by a BMO Mutual Fund, and income and dividends earned by a BMO Mutual Fund, are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero.
Distributions, if any, for all series of securities of a BMO Mutual Fund (other than ETF Series) are automatically reinvested in additional securities of the same series of the applicable BMO Mutual Fund, unless the securityholder elects in writing that they prefer to receive cash distributions. For further information, see the distribution policy for the applicable BMO Mutual Fund in the simplified prospectus.
Legal and regulatory disclosures
This information is for Investment Advisors only. By accepting, you certify that you are an Investment Advisor. If you are NOT an Investment Advisor, please decline and view the content in the Investor or Institutional areas of the site. The website is for informational purposes only and is not intended to provide a complete description of BMO Global Asset Management’s products or services. Past performance is not indicative of future results. It should not be construed as investment advice or relied upon in making an investment decision. Products and services of BMO Global Asset Management are only offered in jurisdictions where they may be lawfully offered for sale. The information contained in this Website does not constitute an offer or solicitation by anyone to buy or sell any investment fund or other product, service or information to anyone in any jurisdiction in which an offer or solicitation is not authorized or cannot be legally made or to any person to whom it is unlawful to make an offer of solicitation. All products and services are subject to the terms of each and every applicable agreement. It is important to note that not all products, services and information are available in all jurisdictions outside Canada.