Group Co.
Proposed CSA Reforms and the Effect on Our Culture of Compliance
Traders Magazine Online News, February 21, 2019
In June 2018, the Canadian Securities Administrators published proposed amendments to National Instrument 31-103 and Companion Policy 31-103CP. I have chosen to analyze three major components of those proposed reforms:
- Know your product (KYP);
- Suitability, and;
- Conflicts of Interest
These proposals are client-focused reforms that put the interest of the client before any other consideration relevant to the client-registrant relationship. Some of these proposed amendments would impose new requirements, while others would codify best practices set out in existing CSA and SRO guidance. The combination of the codification of best practices and the introduction of new requirements will result in a new, higher standard of conduct for all registrants.[1]
Client-Focused Reforms 
In order for registrants and registered firms to deal honestly and fairly with clients, these amendments are designed to apply to each stage of the client-registrant relationship. The KYC and KYP amendments form the foundation for other provisions: KYC is intended to provide clarity about the regulator’s expectations of what information must be collected about a client; KYP outlines what constitutes a thorough understanding of products and full transparency of product attributes in client communication. In addition, the provisions address how conflicts of interest should be dealt with in the best interest of the client, including restrictions on referral arrangements and prohibitions against misleading marketing and advertising. In the conflicts of interest and suitability amendments, registrants would have to resolve all existing and reasonably foreseeable conflicts of interest by putting the client’s interest first. These include conflicts resulting from compensation arrangements and incentive practices.
Developing and Maintaining a Culture of Compliance
There seem to be numerous differences in the culture of compliance among firms, especially in how it is implemented in small dealers compared to larger bank-owned institutions in Canada. I have found that bank-owned dealers’ compliance professionals are disinclined to support new product development, whereas compliance departments at smaller dealers work more collaboratively with the business in new product design and marketing. The banks’ “tick-the-box” approach to compliance creates a rigid evaluation system based on existing product structures. So, new products are unlikely to fit the established criteria. This creates lost opportunities for the bank client. One possible reason for this rigidity is that the banks have a powerful distribution channel, which means they do not have to be innovative to compete. Smaller dealers, on the other hand, must develop a strong value proposition, which requires innovation to compete against the banks.
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