Advisors should be protected when serving vulnerable clients

Canadian financial advisors need to know that when they’re serving clients at risk of exploitation, some form of safe harbour is established to protect them from litigation. That’s the message from a new paper published Tuesday by the Investment Industry Association of Canada (IIAC).

The report also called on securities regulators to “emphasize the importance of client autonomy and property rights.”

Canadians can become vulnerable to financial exploitation at any age, due to “injury, illness, mental health issues, cognitive impairment, disability and financial illiteracy,” the report noted.

The circumstances are often complex though, according to the report: “There are a myriad of relationships and family dynamics that may give rise to what may be perceived as undue influence. In some cases, a client may demonstrate overt signs of undue influence while, in other cases, undue influence may develop subtly and slowly over time.”

In a written statement to Advisor.ca, IIAC said the organization would like to discuss what form safe harbour might take with securities regulators. “An acknowledgement of the significance of client autonomy and property rights, and greater emphasis on the practical difficulties associated with identifying signs of vulnerability would be helpful,” it said. “In order to promote client autonomy, registrants must be confident that their regulatory obligations are reasonable, clear and complete.”

It’s unfair to assume, IIAC wrote, “that every registrant will be uniquely situated to make these observations or reach these conclusions for all clients.”

“Guidance should explicitly recognize that ‘warning signs’ of vulnerability, exploitation or incapacity may be latent or undetectable. … In some cases, there may be no reasonable information available to a registrant at the time of making an investment action that would suggest to the registrant that a client is, for example, vulnerable to financial exploitation,” IIAC added.

The report noted that the Canadian Securities Administrators addressed the question of client vulnerability in its amendments to National Instrument 31-103 and Companion Policy 31-103CP. “Those amendments built on earlier [Ontario Securities Commission] and [Investment Industry Regulatory Organization of Canada] guidance notes with the goal of protecting vulnerable investors by introducing the concept of a ‘trusted contact person’ into the client identification process, and clarifying the circumstances in which a registrant may place a temporary hold on a client transaction in response to concerns of financial exploitation or incapacity.”

NI 31-103 defines “financial exploitation” as “the use or control of, or deprivation of the use or control of, a financial asset of an individual by a person or company through undue influence, unlawful conduct or another wrongful act.”

That’s too broad, according to IIAC’s report: “Based on this definition, financial exploitation can emerge from a spectrum of circumstances and relationships including family and other personal relationships. While there may be instances in which the financial exploitation of a client is observable to a registrant, there are likely to be cases in which the signs of financial exploitation remain latent.”

Kevin Press

Kevin Press is editorial director for Advisor.ca. He has been writing about money since 1997. Reach him at kevin@newcom.ca.