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Advisor News Regulators up the ante on protecting aging investors with best practices on trusted contact person, other measures

The trusted contact person and other suggested best practices are a response to what regulators have been hearing from the financial services industry and the public at large, says Tyler Fleming, director of the Investor Office at the Ontario Securities Commission.

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Protect the aging and vulnerable. That’s the gist of a recent staff notice from the Canadian Securities Administrators (CSA) recommending that registered dealers and their financial advisors adopt new practices when working with clients who fit these profiles.

“As a first step, we published suggested practices for serving older or vulnerable investors and recognizing signs of potential fraud and financial exploitation,” says Tyler Fleming, director of the Investor Office at the Ontario Securities Commission (OSC), one of the key members of the CSA, the umbrella group of Canada’s provincial and territorial securities commissions.

Significant among the CSA’s recommendations is that firms put in place safeguards such as the trusted contact person, a concept gaining recognition across the industry. The trusted contact person would not be the power of attorney, nor would he or she make any decisions about the client’s finances, the CSA document states. Rather, the trusted contact person is someone a client knows well whom advisors could contact if they believe something is amiss, or to double-check whether a client is experiencing financial abuse or diminished capacity.

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Mr. Fleming adds that the trusted contact person and other suggested best practices are a response to what regulators have been hearing from the financial services industry and the public at large following extensive consultations.

Other recommendations include ensuring that know-your-client documents are updated regularly to include major changes in clients’ lives, such as a diagnosis of a serious illness or the death of a spouse, and that advisors receive enhanced education to identify financial abuse and diminished mental capacity.

Furthermore, regulators are also examining whether firms should have mechanisms in place that allow advisors to put temporary holds on trade orders and similar requests from clients when advisors suspect the orders stem from financial abuse or diminished capacity, although the CSA’s staff notice did not address this topic.

In tandem with the temporary freeze is another concept regulators are looking at: that firms, regulators themselves and the courts provide a regulatory safe harbour for advisors when they take these measures to protect a client.

“Basically, this [safe harbour] speaks to the idea that we, as regulators, don’t want to end up punishing people for doing the right thing,” says Andrew Kriegler, president and chief executive of the Investment Industry Regulatory Organization of Canada (IIROC).

These enhanced protections already have widespread support from the public, based the findings of a recent investor survey that IIROC highlighted in a report released in June titled Awareness and Attitudes Related to Provisions to Protect Vulnerable Investors and Investment Firms/Advisors.

“We found the vast majority of people surveyed supports the idea of having a trusted contact person, regulatory safe harbour and a temporary safe hold,” Mr. Kriegler adds.

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Yet, he also notes Canadians surveyed also want to make sure their privacy is protected.

Indeed, striking a balance is important, especially when dealing with aging clients, who may be more at risk of being vulnerable but are, for the most part, still capable of making sound decisions, says Laura Tamblyn Watts, chief public policy officer at CARP (formerly the Canadian Association for Retired Persons).

“It’s important to understand that not all old people get cognitive impairment and not all older people are vulnerable,” she says. As such, the industry must be careful not to overstep.

Still, the need for stronger protections is palpable given the prevalence of elder abuse in Canada, Ms. Tamblyn Watts argues.

“About one in 10 seniors are subject to abuse,” she says, pointing to a 2015 study from the National Initiative for the Care of the Elderly titled Into the Light: National Survey on the Mistreatment of Older Canadians.

And financial abuse accounts for one in five of those seniors who suffered some type of abuse, Ms. Tamblyn Watts notes.

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But it’s not just the potential for abuse that’s a concern. With age, clients are at higher risk of diminished cognitive capacity, often a result of neurological diseases such as Alzheimer’s or dementia.

“What we know is a person in Canada is diagnosed with Alzheimer’s every six minutes,” she adds. Consequently, the need for proper safeguards is growing constantly. That’s a key reason why advisors should be having conversations regarding the trusted contact person with clients as soon as possible.

“We’re already being flooded with these issues now,” Ms. Tamblyn Watts says, and it will only become more problematic as the population continues to age. Yet, the IIROC survey found that only 22 per cent of investors in Canada have a trusted contact person – and of those who don’t, only 2 per cent had talked about the issue with an advisor.

Of course, other measures must be in place for the trusted contact person to be effective. That’s why CARP also supports that in “circumstances informed by evidence, good faith and education, a freeze on the assets [and] not allowing a trade to go through … [are] good ideas” when advisors recognize a problem, Ms. Tamblyn Watts says.

However, one concern is that, for now, these are only recommendations, not regulation. But Mr. Kriegler says the trusted contact person, safe harbour and other suggestions are likely to become part of the regulatory framework in due time.

“But we need to take the necessary time to set up a clear and transparent process that advisors, firms and Canadians can understand,” he says, adding that privacy concerns around contacting someone about a client’s finances is a “pretty significant” issue.

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Still, some firms are already taking steps to protect vulnerable clients. For example, Oakville, Ont.-based Bellwether Investment Management Inc. has had a vulnerable person policy in place since early 2018, says Alan Fustey, vice president and portfolio manager at the firm’s Winnipeg office.

Notably, the policy doesn’t include a trusted contact person measure. What’s more, Mr. Fustey is skeptical of its effectiveness.

“Establishing a trusted contact person would be difficult when an individual has no close family relationships; and, unfortunately, these types of clients can be particularly vulnerable to abuse,” he says.

What’s important is that advisors are as familiar as possible with their clients’ financial and personal circumstances, Mr. Fustey adds. “Ultimately, I believe that an effective process relies on an advisor’s good judgment and common sense when there may be circumstances occurring that can harm a vulnerable client.”

However, he says that empowering advisors only works if there is a formal policy allowing them to take concerns to compliance to determine the next step.

Ms. Tamblyn Watts admits the recommendations may not be perfect, but they’re a step in the right direction.

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“We certainly wish they would move toward a more regulatory nature in this area and perhaps they will eventually end up there,” she says, noting that the United States has made the trusted contact person part of its regulatory framework.

What’s more, the fact regulators are indicating these guidelines are best practices make them difficult for dealers and advisors to ignore, especially with issues of vulnerability cropping up more often as clients get older.

“When a regulator says this is the expected practice,” Ms. Tamblyn Watts says, “it’s at the financial institutions’ and the advisors’ peril to do otherwise.”

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