Month: March 2022
In this bulletin:
- A Matter of Time: FSRA Consultation on Licensing Requirements for Mortgage Agents and Brokers
- FSRA Releases New Approach Guidance for Principles – Based Regulation at All Times
- Make Time for IIROC’s Compliance Priorities Report
- A Devil of a Time: When the Regulatory “Best Interest” Standard is Not a Fiduciary Standard
- Keep Calm, Deal With Complaints and Carry On – 2021 Ombudsman for Banking Services and Investments (OBSI) Annual Report: Investment Highlights
In Brief: Watch Your Titles – Approval of FSRA’s Title Protection Regime
Important Reminders: Is It Summer Already? Reminder Regarding Upcoming Deadlines for Reporting “Other Activities” ▪ Reminder Regarding Timely Preparation and Delivery of Annual CCO Report
FAQ Corner: What Are My KYC Update Requirements Post December 31, 2021, under the Client Focused Reforms?
BLG’s Resource Corner
News & Events
Click the link to access a PDF of our full, monthly bulletin summarizing these recent developments. >> Monthly Bulletin | Daylight Saving Time Debate Edition | March 2022
On February 11, 2022, the Financial Services Regulatory Authority of Ontario (FSRA) announced that it is consulting on guidance that outlines new educational requirements and new licence categories for mortgage agents and mortgage brokers transacting in private mortgages (the Guidance).
The Guidance sets out new proposed licence classes that would be effective April 1, 2023, being mortgage agent level 1, mortgage agent level 2, and mortgage broker. Mortgage agents with a level 1 licence would be permitted to deal and trade in mortgages provided by financial institutions (as defined by the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA)) and lenders approved by the Canada Mortgage and Housing Corporation (CMHC). Mortgage agents with a level 2 licence would be permitted to deal and trade in mortgages provided by financial institutions (as defined in the MBLAA), lenders approved by the CMHC, and all other lenders, such as mortgage investment corporations, syndicates, private individuals, brokers, and brokerages. Mortgage brokers would be permitted to deal and trade in mortgages provided by financial institutions, lenders approved by the CMHC and all other lenders. Mortgage brokers would also be permitted to supervise mortgage agents and could be appointed as the principal broker for a brokerage.
While a mortgage agent level 1 would not need any particular outlined experience, an applicant would have to complete the Mortgage Agent Level 1 Course and apply for a mortgage agent level 1 licence within two years of successfully completing the course. A mortgage agent level 2 would need to have at least 12 months experience over the last 24 months as a mortgage agent level 1 and complete the Mortgage Agent Level 2 Course and the Private Mortgages Course. A mortgage broker would need to have at least 24 months experience over the last 36 months as a mortgage agent level 2 and complete the Mortgage Agent Level 1 Course, Private Mortgages Course and the Broker Course.
There are a number of proposed transition periods for persons licensed under the current requirements which start April 1, 2023, and end March 31, 2024. Certain existing licensees with more than 5 years experience who wish to obtain the mortgage agent level 2 or mortgage broker license may be permitted to take a challenge exam in lieu of the Private Mortgages Course.
The Guidance also includes details on licensing fees, new continuing education requirements that are effective April 1, 2023, labour mobility between provinces, applications for education and experience equivalency, supervision approach and principles, and compliance and enforcement provisions.
Along with the Guidance, draft proposed amendments to the MBLAA reflecting the changes proposed in the Guidance have also been published.
If you have any questions regarding these proposed changes, please contact a member of our team.
March 31, 2022
The Financial Services Regulatory Authority of Ontario (FSRA) released a draft Approach Guidance (Guidance) which outlines its plans for principles-based regulation, including its “Framework Principles” and an explanation of how such regulation will be implemented and how it will impact FSRA regulated entities and individuals. In the Guidance introduction, FSRA notes that principles-based regulation is used by leading financial services regulators globally, and helps regulators respond quickly to consumer needs and technological changes, focus on desired regulatory outcomes and reduce regulatory burden through a flexible regulatory approach. This approach by nature allows regulated entities to determine how they can each best achieve the desired regulatory outcomes, based on size, complexity and risk profile.
The general statements included in the Framework Principles include the following:
- FSRA will be outcome focused and spend its time on the outcomes it seeks to achieve for consumers and pension plan beneficiaries;
- FSRA will facilitate innovation in the sectors it regulates;
- The focus will be consumer-centric (i.e. the impact on consumers and pension plan beneficiaries);
- FSRA will utilize a risk-based approach and focus on issues and entities that pose the highest risk;
- FSRA will be transparent by communicating its expectations, requirements, activities and performance to stakeholders; and
- Stakeholders will be engaged though public consultations as part of FSRA’s collaborative
The principles-based approach means that FSRA will refer to broadly stated principles in guidance or rules and explain desired outcomes. For credit unions, pension plans or insurers, the Guidance specifically notes that FSRA will place more reliance on an entity’s senior management (for a pension plan, the plan administrator) and board of directors to internalize the requirements needed to achieve the stated outcomes. While industry best practices may be used to help assess the regulated entity/individual’s approach, they are intended to provide insights into what is being done by industry peers and provide a baseline to help identify practices that work best for the individual organization. FSRA does note further on in the Guidance that in certain areas, it will need to continue to rely on detailed rules and requirements to ensure adequate consumer and pension plan beneficiary protection. Factors that will impact the approach to be adopted by FSRA include the complexity of the regulatory problem and the sophistication and resources of the entity to address the issue effectively. Finally, FSRA notes it will be releasing specific guidance on its approach to investigations and enforcement processes and practices.
Comments on the draft Guidance will be accepted until April 29, 2022.
March 31, 2022
Earlier in March, the Investment Industry Regulatory Organization of Canada (IIROC) released its 2021/2022 Compliance Priorities Report, outlining its past actions and current issues that are impacting IIROC-regulated firms that should be a compliance focus for those firms in 2022. The report notes that these initiatives, including those related to cybersecurity, client focused reform sweeps and proficiency requirement updates, are in the context of the ongoing SRO consolidation with the Mutual Fund Dealers Association of Canada (MFDA), which is currently scheduled to occur by year-end.
In connection with the work of the Financial and Operations Compliance group (FinOps), the report noted that cybersecurity remains a key risk for all dealer firms and thus FinOps looks at how such risks are managed during regularly scheduled reviews. The importance of self-assessments is mentioned, as is the fact that IIROC has engaged Deloitte to create a cybersecurity self-assessment checklist for firms to assess their own risk and identify potential improvements. The reliance on technology and associated risks has also been incorporated into the FinOps risk model. It is noted that FinOps intends to review supply chain risks, and systemically important vendors to the industry, with a view to identifying and managing these risks.
The report indicates that IIROC, together with the Canadian Securities Administrators (CSA) and the MFDA, is conducting reviews to look for compliance with the new conflict of interest requirements that were enacted in connection with the client focused reforms back in June 2021. The objective of the review is stated to be to determine if dealers have met the “spirit” of the new rules and implemented controls to address material conflicts in the best interest of clients (rather than disclosure alone, which is not sufficient). IIROC (and we suspect, the CSA), will focus next on KYC and suitability requirements. IIROC, along with the CSA, has a prohibition on using a corporate officer title unless a person has been appointed as an officer pursuant to corporate law. In its reviews, the Business Conduct Compliance (BCC) group of IIROC will also look at the substance and nature of the relationship between an Approved Person and the dealer where the person uses a corporate officer title in dealing with clients to ensure it is appropriate – such as whether the individual is really part of the mind and management of the dealer. In its exams, BCC staff will also assess compliance with the amended rules regarding older and vulnerable clients, which are intended to address issues of diminished mental capacity and/or financial exploitation of clients.
Dealers are required to have a supervisory framework to ensure management of all significant areas of risk within a firm. IIROC has existing guidance to help dealers with these policies and procedures, and it is expected to publish additional guidance regarding permitted delegation of the responsibilities of executives to manage these risks shortly. IIROC will also be focusing in on order-execution-only firms and any advertising done through social media platforms.
Finally, the report notes that IIROC is working on amendments to some of the registration and proficiency provisions within the IIROC rules, to clarify expectations. In addition, while draft competency profiles have been released for Directors, Executives, UDPs, CCOs and CFOs, IIROC is continuing to work on all other approved person categories (i.e. supervisors, associate PMs, PMs and traders). There is a lot for dealers to focus on in 2022, in addition to any forthcoming changes in advance of the SRO consolidation.
March 31, 2022
At a Glance: Earlier this month, the Ontario Divisional Court decision in Boal v. International Capital Management Inc. provided some clarity on the scope and nature of the duty owed by financial advisors to their clients, and their obligations under the client focused reforms (CFRs), introduced by the Canadian Securities Administrators (CSA) in 2019 (and subsequently integrated into the rules and policies of the Investment Industry Regulatory Organization of Canada and the Mutual Fund Dealers Association of Canada) (IIROC and MFDA, respectively). Specifically, the court re-affirmed that a fiduciary duty between financial advisors and their clients is ad hoc, established on an individual, case-by-case basis, and is dependent on a multi-factorial analysis as required by common law. As such, a fiduciary duty does not arise solely due to regulatory standards and professional rules which require advisors to act in the “best interest” of the client.
Background: The plaintiff, a former client of the defendant, a registered member of the MFDA, commenced a class action against the investment advisor claiming breach of fiduciary duty, knowing receipt and knowing assistance, stemming from losses sustained from an investment in promissory notes. The certification judge denied the motion, holding that the Statement of Claim did not establish the material facts necessary to support a finding of a fiduciary relationship between the class members and the financial advisor. Further, it would not be possible to establish an ad hoc fiduciary relationship with the class, unless it could be shown on an individual, case-by-case examination that each individual of the class evidenced the traditional common law hallmarks of a fiduciary relationship. The plaintiff then appealed the decision to the Divisional Court.
Issue: On appeal, the primary issue was whether an ad hoc fiduciary relationship could be established between the class members and the defendant based on the “best interest” regulatory standard enshrined in the rules, regulations and by-laws of the MFDA and the FP Canada Standards Council Code of Ethics (professional standards).
Decision: In a 2 to 1 decision, the majority of the Divisional Court held that because ad hoc fiduciary relationships arise based on the specific circumstances of a given relationship, a fiduciary duty between a financial advisor and a client will only be found where the multi-factor test stated in the Ontario Court of Appeal decision of Hunt v. TD Securities Inc. (taken from the Supreme Court of Canada test in Hodgkinson v. Simms) is satisfied, on an individual basis. The Hunt test considered five factors: a) the client’s degree of vulnerability; b) the degree of trust between the client and advisor; c) the history of reliance and any representations of special skills and knowledge by the advisor to the client; d) the extent of the advisor’s discretion over the client’s account; e) and any professional rules or codes of conduct which inform the duty owed by the advisor and the standard of care. As such, the majority found that a fiduciary duty could not be established on a class wide basis as strictly the result of standards imposed by regulatory rules and regulations which require advisors to act in the “best interest” of the client.
The key distinction between the dissent and majority opinions centered around the weight afforded to the fifth factor (professional rules or codes of conduct). Sachs J. in dissent, placed a strong emphasis on a self-regulating body to set the standard for their profession, relying on the remark in Hodgkinson, that “It would be surprising indeed if the courts held the professional advisor to a lower standard of responsibility than that deemed necessary by the self-regulating body of the profession itself.” While in the majority’s view, the dissent had reduced the five-factor analysis to a “’one-size-fits-all’ duty that would apply to every investor, regardless of discretionary authority over the account, or sophistication of the client.” The majority also took the view that imposing a fiduciary duty in the absence of the other four indicia would negatively impact both investors and capital markets.
Additional points and takeaways: It is important to note that the dissent of Sachs J. opens the door for the plaintiff to appeal the Divisional Court’s decision to the Ontario Court of Appeal. Even so, parties should keep in mind, as the majority notes, that even if the “best interest” regulatory standard does not impart a fiduciary relationship between financial advisors and their clients, “duties of good faith, care, confidentiality and disclosure apply to a variety of non-fiduciaries as well.”
-  Hunt v. TD Securities Inc. (2003), 66 OR (3d) 481 (CA), at para 40.
-  Hodgkinson v. Simms,  3 SCR 377 at 425.
-  Boal v. International Capital Management Inc., 2022 ONSC 1280 at para 68.
-  Ibid at para 70.
March 31, 2022
On March 15, 2022, OBSI released its annual report for 2021, declaring the year its busiest year on record, with 7,593 consumers reaching out to complain, a 33% increase from 2020. Of that record number, 568 were investment related, a 24% increase compared to the 459 complaints reported in 2020.
The investment related complaints resulted in $1.9 million in payouts to consumers, seven times more than the payouts on the banking services side. The average payout was $8,896, the highest payout was $156,635, the lowest $50. In six of the cases, the consumer accepted either a letter of apology or an explanatory letter to the consumer’s creditors to resolve the matter.
The highest number of complaints (16%) related to technical and non-technical service issues. Concerns about investment suitability, and misrepresented or inaccurate disclosure about a product, were tied at 14% of the complaints. Of note, investment suitability concerns were down from 19% in 2020. A look at complaints by product shows that common shares (equities) had the highest amount of complaints. The top three issues noted were transaction errors, investment suitability and margin issues. Mutual funds had the second highest number of complaints, and the top three issues identified in the report were instructions not being followed, investment suitability and transfer delays.
OBSI constantly gathers information, from day-to-day inquiries, or information gleaned during an investigation, that helps identify trends in the industry. Trends that affect multiple consumers in the financial services sector are known as “systemic issues” that impact a wider base of consumers. In 2021 OBSI reported on a few specific systemic issues, including understating and misrepresenting the risk of a fund and disregarding documented investor risk tolerance.
In addition to specific case related reports, OBSI provides trending data on products, outcomes, and complaint sources (phone, email, website) to the regulators, providing information to the regulators and the financial services industry as a whole.
March 31, 2022
As reported in a number of previous AUM Law bulletins, the Financial Services Regulatory Authority of Ontario (FSRA) had released Rule 2020-001 Financial Professionals Title Protection under the Financial Professionals Title Protection Act, 2019, the purposes of which are to ensure that people providing financial planning or financial advisory services are qualified to do so and to help alleviate consumer confusion. The Financial Professionals Title Protection Rule and a related fee rule have now been approved by Ontario’s Minister of Finance and the Act was proclaimed into force on March 28, 2022. As a result, individuals operating in Ontario will no longer be able to call themselves “financial planner”, “financial advisor”, or any title that can reasonably be confused with those titles, without holding a recognized credential from a FSRA approved credentialing body. As such, individuals will be required to meet minimum educational requirements and abide by a code of conduct set out by the credentialing body.
An appendix to the Approach and Interpretation Guidance – Financial Professionals Title Protection – Supervisory Framework (Supervision Guidance) provides examples of titles that FSRA considers could reasonably be confusing to clients, to help provide clarification to market participants. It is expected that approved credentialing bodies will be announced shortly. There are a number of requirements set out for approval as a credentialing body, including having policies and procedures in place to ensure that credential holders put the client’s interests first and to ensure the fair treatment of consumers.
There are transition periods available to persons not yet holding a recognized credential; four years for the financial planner title and two years for the financial advisor title from March 28, but only if those titles were already in use as of January 1, 2020. Please contact your usual lawyer at AUM Law if you have any questions on the implementation of these new rules.
March 31, 2022
Think way, way back to our January 2022 bulletin, where we wrote about the final changes to the Outside Business Activities (OBA) framework, effective as of June 6, 2022. Two months have just flown by, and so will the time between now and June.
The amendments to National Instrument 33-109 Registration Information and National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations establish rules for the newly coined “Outside Activities”. Going forward, there will be five categories of activities that will be considered Outside Activities, and so it is likely that individual registration forms currently filed with the regulators (Form 33-109F4 Registration of Individuals and Review of Permitted Individuals) include activities that are no longer reportable. It is equally possible that these forms, particularly if they are quite old, may be missing information that is now required to be included (such as any business titles and professional designations in use).
Registrants will be provided until June 5, 2023, to update their individual information forms to comply with the new requirements. However, if a reportable change in an individual’s form occurs between June 6, 2022, and June 5, 2023, then that change will require the registrant to review and update all information in the form at that time to ensure it is compliant with the new requirements. Depending on the last update of the form, the volume of changes required, as well as the number of registrants at any particular firm, these updates could be quite a substantial undertaking. In addition, firms should be reviewing their policies and procedures and training materials to ensure everyone is up to speed on the new reportable activities.
Chief Compliance Officers may wish to start considering how best to start their internal reviews of these forms in the coming weeks.
Your friendly AUM lawyer would be pleased to assist with any or all of the above tasks, just reach out to any one of our team members.
March 31, 2022
If not already completed, firms with a December year end should turn their attention to the required annual report from the Chief Compliance Officer. National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations requires that a CCO submit an annual report to a registered firm’s board of directors (or individuals acting in a similar capacity if there is no board) for the purpose of assessing compliance by the firm and individuals with securities legislation.
Staff at the Ontario Securities Commission have provided guidance in compliance audits and annual reports with respect to their expectations for these reports, including in OSC Staff Notice 33-751 Summary Report for Dealers, Advisers and Investment Fund Managers, and this guidance should be reviewed to help ensure the report includes all expected commentary. While each report must be individually prepared based on the events of the past year, they should typically include items such as:
- compliance highlights;
- the operation of a firm’s policies and procedures;
- any changes made to a firm’s compliance infrastructure or individual registrations; and
- a description of any compliance issues, including with respect to any reports made, complaints filed and a firm’s personal trading program.
For the year ended December 31, 2021, we would expect that such reports would include a description of changes made to a firm’s policies and procedures to implement the client focused reforms, as well as the new expectations around vulnerable clients and trusted contact persons. AUM Law frequently helps firms with these reports, and we would be pleased to assist.
March 31, 2022
Answer: As set out in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (31-103), as a registrant you are now required to follow all the new KYC and suitability requirements. Section 13.3(2) of NI 31-103 provides, among other things, that a registrant must take reasonable steps to ensure it has sufficient information about its clients regarding certain factors to enable it to meet its suitability determination, including the client’s personal and financial circumstances, and the client’s investment needs, objectives, investment knowledge, risk profile and investment time horizon. In addition, Section 13.2(4) of NI 31-103 specifically provides that you must “take reasonable steps” to keep the KYC information current, including updating the information within a reasonable time after becoming aware of a significant change in the client’s information that you have in your files.
As noted in the CSA’s FAQs on the Client Focused Reforms, CSA staff have stated that they expect registrants to schedule KYC updates in accordance with the triggers set out in Section 13.2 (4.1). CSA staff specifically note that as a registrant, you must use your professional judgement, when interacting with clients, to determine if you need to ask about any significant changes to the client’s circumstances and then update the KYC information accordingly. With respect to how often you need to reach out to clients (assuming they do not reach out to you to let you know of a significant change), the expectation is that you will periodically confirm with clients that the information you have is current. One suggestion provided is that you consider having more frequent interactions at set intervals; again, all depending on your relationships and mandate with your clients. In all cases, your policies and procedures must demonstrate that you have taken reasonable steps to keep KYC information up to date. Your firm must also provide training to all registered individuals on compliance with securities legislation, including the KYC obligations.
March 31, 2022
Our colleagues at BLG have written the following articles we thought might interest our readers:
For more information, please visit the BLG website.
March 31, 2022
We are delighted to welcome Vivek (Vik) Bali as Legal Counsel to AUM Law. Vik’s practice will focus on regulatory compliance. Before joining AUM Law, Vik articled and then worked in the KYC, Compliance and AML spheres at UBS Bank (Canada). Vik graduated from Osgoode Hall Law School in 2019. Before heading to law school, he earned a B.Sc. in Biochemistry from York University.
We are also thrilled to welcome Ayn Greaves as a Compliance Consultant at the firm. In her role, Ayn will be assisting our clients to navigate the complicated regulatory environment, including helping lawyers complete audits, questionnaires, AML reviews, policies and procedures reviews, and advising on risks. Prior to joining AUM Law, Ayn started her financial services career at IIROC, and since then has worked in various investment advisory, wealth management and banking firms, most recently as a Senior Manager in Regulatory Compliance at President’s Choice Bank. Ayn holds the Certification in Risk Management Assurance (CRMA) Designation.
March 31, 2022