Answer: Canadian securities laws require that a registered firm manage material conflicts of interest in the best interests of its clients. The Canadian Securities Administrators have provided guidance that paid referral arrangements are an inherent conflict of interest which, in their experience, are almost always material. While much of the guidance then focuses on out-bound referral arrangements (a registered firm referring a client to a third-party in exchange for a referral fee), we believe the guidance can equally apply to an in-bound referral arrangement (a third-party, such as a wealth planner, referring a client to a registered PM). In order to manage this conflict of interest, in addition to compliant client disclosure, the registered firm should have procedures in place to verify that the proposed referral arrangement will serve its clients’ best interests. These procedures can include a due diligence review of the referrer’s reputation and level of service, and confirmation that the referrer: (i) is qualified to render its services and is not subject to any civil actions or regulatory or professional disciplinary matters, and (ii) does not hold itself out as providing services that it is not registered to provide. The registered firm must also of course determine that its services are suitable for the client. Importantly, the CSA have also provided that If a client pays more for the same, or substantially similar, products or services as a result of a referral arrangement, they will not consider the inherent conflict of interest to have been addressed in the best interest of the client.
June 30, 2021