COVID-19 RESPONSE
Throughout the pandemic the MFDA has focused on maintaining the health and safety of all stakeholders. During FY 2021 MFDA staff continued to carry out their duties in a work-from-home environment and key regulatory functions such as compliance examinations, enforcement interviews and disciplinary hearings were carried out remotely. During this time, the MFDA continued to accept, review and respond to complaints or inquiries from the public.
MFDA staff took a number of steps to keep Members and stakeholders informed of COVID-19 related developments and maintained information relevant to Members and investors regarding the pandemic on the COVID-19 section of the MFDA website. MFDA staff provided assistance to Members in identifying solutions to various operational challenges posed by the pandemic while continuing to ensure investor protection.
CLIENT RESEARCH PROJECT
In FY 2021 the MFDA completed its review of a significant volume of data relating to Members, advisors and their clients. This follows a previous review of similar data completed in 2018.
While all securities regulators in Canada obtain data and information relating to the activities of the registrants they regulate, the MFDA has undertaken the unprecedented approach of also gathering detailed information relating to clients of MFDA Members. MFDA Members, more than any other securities registrants, provide services to the largest concentration of mass-market households in Canada (i.e. households with less than $100,000 in financial wealth). Protecting vulnerable investors, including seniors and investors with limited financial resources, is a key priority of the MFDA. While access to financial advice is important to all Canadians, it is especially so for those with limited financial resources. This collection of data enables the MFDA to monitor access to financial advice and the availability of choice in advisory services. With the aging population and decline in the number of defined benefit plans in Canada, it is imperative that Canadians, particularly mass-market households, continue to have access to financial advice and the ability to choose services that meet their needs. Maintaining knowledge and awareness of client circumstances, outcomes, and issues that impact Canadian investors through the use of this data is key to meeting our investor protection mandate.
Based on the data collected, MFDA staff published the MFDA Wealth Management Footprint Report, which provides a snapshot of findings to highlight the breadth of MFDA Members’ wealth management footprint in Canada. This was followed with the publication of the full Client Research Report 2020: A Continued Look Into Members, Advisors and Clients which provides a detailed analysis of areas such as costs, client portfolio makeup and advisor book trends. Both reports summarize data provided by every MFDA Member and illustrate the significant role that MFDA Members and their advisors have in the Canadian financial marketplace.
The data collected also allowed staff to conduct a review of performance reporting, specifically focused on those client accounts with unusual returns. On July 26, 2021, MFDA staff published the Performance Reporting Targeted Review report that provides a summary of the analysis and work performed during the review, our key findings and recommendations.
In March 2021 MFDA staff requested new data from Members for the next cycle of MFDA client research.
VULNERABILITY AND FINANCIAL ADVICE
The MFDA issued a paper entitled Vulnerability and Financial Advice: A Broader Look at the Factors That May Increase the Risk of Client Vulnerability for educational purposes and to promote further awareness and discussion of client vulnerability. The paper was part of the MFDA’s ongoing work to help Members better identify vulnerable clients and understand their needs. The paper takes a broad look at the concept of vulnerability and encourages consideration of the various factors that may increase the risk of client vulnerability including health, life events, resilience and capability. The COVID-19 pandemic has also significantly increased social isolation which can be a cause of vulnerability and a significant factor contributing to the risk of financial exploitation and investment fraud. As discussed in the paper, when looking at vulnerable clients broadly, these clients may not only be at risk of further harm, but may also have different needs than other clients. The impact of vulnerability on clients can be significant and these clients may be more likely to fall into debt, take unnecessary investment risks or fall victim to financial fraud. The paper also shares best practices and practical actions to help meet the needs of vulnerable clients and provides references to additional resources on this important topic.
EXPANDED COST REPORTING
The MFDA continued its work on exploring the expansion of cost reporting to include certain costs, such as total investment fund management fees and operating costs, which are not captured by current Client Relationship Model Phase 2 (CRM2) reporting requirements. The MFDA retained the research firm Behavioural Insights Team (Canada) (BIT) to assist with behavioural science research in understanding client barriers regarding cost disclosures and to collaborate with MFDA staff on the design and testing of expanded disclosure formats with over 5,000 Canadian investors.
The objectives of the research were to:
- Understand investor preferences for expanded cost reporting;
- Identify key barriers and enablers of investor comprehension and action of expanded cost information;
- Develop and test disclosure formats that reflect an understanding of investor behavior; and
- Generate evidence on the impact of certain cost formats.
On July 26, 2021, the MFDA issued the final results of this research in the report Improving Fee Disclosures for Canadian Investors and also provided a discussion of the results at an accompanying webinar. The research indicates that Canadian investors have a clear preference for expanded cost reporting and that additional cost information increases investor comprehension. The MFDA shared this research to support the CSA with the purpose of advancing the discussion and exploring the viability of expanding current cost reporting.
FUNDING OF OSGOODE HALL INVESTOR PROTECTION CLINIC
In FY 2021, the MFDA committed $150,000 from the MFDA Discretionary Fund to the Osgoode Hall Investor Protection Clinic (Osgoode IPC). The Osgoode IPC is a pro-bono legal clinic that specializes in investor protection issues and provides free legal advice to people who cannot afford a lawyer. The Osgoode IPC will use the funding to expand capacity for the services that it offers to investors who believe their investments were mishandled.
The MFDA provides additional assistance to the Osgoode IPC through annual MFDA staff participation in the intensive training of Osgoode IPC students and by alerting investors of the service offered by the Osgoode IPC on the “How to make a complaint” section of the MFDA website.
INVESTOR OUT REACH AND EDUCATION
In FY 2021, MFDA staff held meetings with investor advocates and organizations involved in investor engagement, outreach and the protection of vulnerable persons. These outreach meetings provided individuals and organizations an opportunity to dialogue with MFDA staff and share views on issues affecting Canadian investors.
The MFDA commissioned a national poll conducted by an independent research firm which examined Canadian retail investors’ views around the SRO framework review conducted by the CSA. The key finding of the research is published in a report titled, “What Canadian Investors Want in a Modern SRO” and found that Canadians are looking for meaningful change that is both transformative and forward looking. These key findings were shared with the CSA and other stakeholders.
During the course of the year, MFDA staff published a number of Investor Bulletins that focused on helping investors navigate the advisory process during COVID-19 and provided tips to help investors protect themselves from cyber frauds and other scams that became prevalent during the pandemic.
MEMBER AND APPROVED PERSONS EDUCATION AND PROFICIENCY
Over the past year, MFDA staff continued to move forward with development and implementation of Continuing Education (CE) requirements for Approved Persons of MFDA Members. In-depth systems testing of the Continuing Education Tracking and Reporting System (CERTS) was a focus of the past year. MFDA CE requirements establish minimum standards for Approved Persons of MFDA Members in order to keep their industry knowledge current and to maintain a high standard of professionalism.
On July 22, 2021 the MFDA received all required approvals to MFDA Rules and Policies related to the implementation of MFDA CE requirements. These requirements will become effective on December 1, 2021. The MFDA has initiated the process to onboard Members and Approved Persons onto CERTS and anticipates that there will be in excess of 60,000 individuals subject to CE requirements who must be onboarded.
TECHNOLOGY WEBINAR SERIES AND CYBERSECURITY
One of the key initiatives in the MFDA Strategic Plan is to support Member technological innovation and cybersecurity. To satisfy that initiative, the MFDA hosted five technology webcasts in FY 2021:
- Automated Transfers, E-Signatures and Electronic Processing
- The Cybersecurity Assessment Program
- Canadian RegTech for Wealth Management
- Building an Incident Response Plan
- Legal Aspects of Cybersecurity
In addition, the MFDA issued a mandatory cybersecurity survey to all Members to assess the status of Member cybersecurity frameworks. The information from the survey will be used to inform further guidance on cybersecurity and to provide each Member with feedback on its cybersecurity framework.
MFDA RECOGNITION ORDERS
On March 25, 2021, the MFDA’s Recognizing Regulators issued orders varying and restating the MFDA’s Recognition Order effective April 1, 2021. The variation orders clarify and update the MFDA’s terms and conditions of recognition and reporting requirements and include new provisions specifying the permitted use of fines and payments made under settlement agreements entered into with the MFDA and provisions relating to CERTS, including that the MFDA must ensure that CERTS has appropriate internal controls to ensure integrity and security of information.
In addition, effective April 1, 2021 the MFDA was recognized as an SRO in the Northwest Territories, Nunavut and Yukon.
MFDA RULE REVIEW
In furtherance of the goals of “Innovate” and “Update” under the MFDA Strategic Plan, the MFDA initiated a review of MFDA regulatory requirements to ensure that the current MFDA regulatory framework remains appropriate, relevant, and will facilitate responsible innovation in the industry through the use of emerging technology and business models.
In FY 2021 MFDA staff prioritized amendments to its Rules, Policies and guidance to conform with the Client Focused Reform amendments to National Instrument 31-103. As MFDA Members and Approved Persons are now primarily servicing their clients remotely due to the pandemic, MFDA staff issued further guidance on the use of electronic signatures (revised MFDA Staff Notice MSN-0016 Electronic Signatures) and proposed amendments to MFDA Rules 2.3.2 and 2.3.3 (Limited Trading Authorizations).
Going forward in 2021, with the CSA’s decision to establish a new single enhanced SRO (“New SRO”), MFDA staff will assist the committee to be established by CSA in the harmonization of SRO rules for the New SRO rule book.