April 2013

Topics of interest & risk in our industry today

Christine ScainiCompliance Consultant, Market Conduct

Agenda

• Appreciating regulation in our industry• Managing conflicts of interest• Client file/documentation• Privacy• The fight against money laundering• What’s ahead

Risks related to non-compliance

• E&O doesn’t cover consequences of non-compliance and illegal acts

• Sanctions by regulators (including suspension/revocation of license, fines, reimbursement of fees)

• More regulation• A damaged reputation • Consumer complaints• Litigation

Our regulatory environment

• Both provincial and federal laws apply to distribution activities

• Substantial provincial differences

• Sometimes the industry imposes compliance initiatives on itself - the alternative is for regulators to impose it

• Trend is for less regulation – principle’s based

MANAGING CONFLICTS OF INTEREST

Managing conflicts of interest: The Three Principles

An industry initiative, but Regulators have “adopted” these principles for advisors’ business practices:

1. Priority of client’s interest

2. Disclosure of conflict of interest

3. Product suitability - selling to client’s needs

Product suitability -Selling to client’s needs

• One of the 3 principles• An industry guideline for advisors was communicated

several years ago• Regulators expect adherence• Reinforce use of fact find, needs analysis and

document, document, document

Product suitability issues

• Seg vs. mutual funds

• Insurance as an investment

• Leveraging

• Sales to seniors

Base product – choose what’s best for your client’s needs

Insurance as an investmentUniversal life insurance

– An insurance product, first and foremost – is there an insurance need?

– A complicated product – not for everyone– You must establish the client investor profile– In your illustrations, use conservative projections that

are consistent with the investor profile– Avoid the following statements:

• The policy pays for itself.• This is a tax-sheltered investment.

– UL requires more regular monitoring than other products.

– The same good sales practices apply to limited pay par products

Leveraged Loans

• Know your client well• Properly document your files• Not a “one-size-fits-all” solution• Disclose risks associated with leveraging• Strategy requiring frequent monitoring (annually)

Danger zones: Leveraged Loans

Another case encountered by the regulators:– Retired couple:

• He is 60; she is 67.– Retirement income: $19,000– Unused RRSP contributions:

• For him: $17,000; for her: $53,000.

Is this appropriate?

Sales to seniors

• Fast growing demographic

• Loss of ability to “doubt”

• Common reliance on trusted advisor

• Priority for regulators

Seniors as Clients

• Income• Ability to recover from loss of principal• Time horizon• Investment objectives• Risk• Other potential financial needs (health care)• Possible dependency could mean possible fiduciary

duty• Potential issues like capacity, undue influence, conflict

of interest

Issues to consider with seniors

• Regulatory

• Reputation Risk – Media sensitivity to seniors issues

• Family involvement /influence

• Mental capacity

• Advisor asked to take on other roles (POA, executor, beneficiary)

THE CLIENT FILE

Client file – essential

• The client file is the advisor’s ally because it demonstrates:– Sale suitability– Services offered to the client

• A compliant file has value when selling blocks of business – who wants to purchase risks?

• It constitutes evidentiary proof in case of dispute or complaint.

• One advisor’s experience …

Client file – WARNING

Think twice before keeping:

• Pre-signed blank forms (transactions, T2033, inter-funds transfers, beneficiary designations, etc.)

• Blank cheques, signed or not• Copies of driver’s license; medical or lifestyle information

PRIVACY PROTECTION

Privacy protection – legal framework

• Federal privacy legislation (PIPEDA)

• Some provinces have their own privacy legislations (PIPA), substantially similar to federal legislation

Privacy protection

Basic rules:

• Collect only what is necessary for the stated purpose • Obtain appropriate consents from clients to collect,

use, keep and communicate their information• Take appropriate measures to protect personal

information

Privacy compliance program

• Every compliance program should comprise the four following key items:– a compliance officer– policies and procedures on compliance– review periodically of your policies and procedures– training to employees and advisors

• Our compliance program template

Our compliance program template

• Customize to your operation• Fields that are to be filled out are in blue• Please make sure you follow the instructions in red• Delete instructions (in red) before printing

Privacy – what’s the next big concern?

• Privacy breach– Notification requirements (PIPEDA, AB, QC)– Reputation risk (privacy in the news)

• Technology related implications for privacy– Trans-boarder data flows, esp. through ‘software as a

service& the U.S. Patriot Act– Innovations in technology (cloud computing)– Lack of appropriate encryption – Techno-generation & social media

FIGHT AGAINST MONEY LAUNDERING AND TERRORIST FINANCING

What is money laundering?

• Process used to try and hide the true origin and ownership of the proceeds of criminal activities (drug trafficking, fraud or extortion)

• Changing “dirty” money into “clean” money • Represents around $17+ billion a year in Canada• Criminals expect to loose 20-30% during the process of

transforming “dirty” money into “clean” money

What is terrorist financing?

Terrorist groups:• Need financial support to carry out their activities and

achieve their objectives• Establish and maintain financial infrastructures• Can appear to be legitimate businesses

Products and transactions at risk

• Products:– Whole life insurance– Universal life insurance– Non-registered annuities or investments– Mortgages

• Transactions:– International transactions/transfers– Single large premium– Premature surrender/policy cancellation– Third party as owner, payer or payee

What is a suspicious transaction?

Definition:– Financial transaction that you have reasonable

grounds to suspect is related to a money laundering or terrorist financing offence

Consider:– No monetary threshold– Can include several factors, which on their own, are

insignificant, but together, can raise suspicions– Both attempted and completed transactions– Taken out of context, are unusual business

practices

How to evaluate suspicions

• Knowledge of:– the client’s business– his financial history – his past investment behaviour– what’s in the file

• Does the transaction raise questions or give rise to discomfort, apprehension or mistrust? 

Money Laundering

Case Example:– Financial Advisor “smurfing” cash for client

• Long service advisor

• Client is owner of a core area hotel/bar of less than stellar reputation

• Advisor attends to client’s hotel, accepts large amounts of cash

• On four occasions accepted $10K, $10K, $19K & $22K

• Advisor goes to as many as 5 different banks and gets bank drafts in amounts of $2,500 and $5,000

• Advisor admits that he kept individual drafts below $10K because the banks “would ask too many questions”

• Advisor rationalized his actions as he believed that the client did not derive cash from elicit means. Looked at it as customer service.

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Terrorist Financing

Case Examples:

– Not for Profit organizations which are registered with the government of Canada as charitable institutions accept donations (and give tax receipts in return) and move the funds out of Canada to fund terrorist activities in other countries.

Compliance program requirements

Advisors, firms, MGAs, just as insurers, must establish a compliance program for themselves and their employees/advisors that includes the following key elements:– appointing a compliance officer– establishing compliance policies and procedures– regular reviews of these policies and procedures– providing training to people who act on their behalf

(employees and advisors)– Documenting a risk assessment, take appropriate

precautions

Compliance program where to start

• Review compliance regime requirements on FINTRAC’s site– Guideline 4: Implementation of a Compliance

Regime

• Review the training materials on the advisor site and The Learning Centre

Guide to creating an anti-money laundering and anti-terrorism financing program

• We’ve provided a template and advisor guide to help advisors create a compliance program

• Advisor site: 

Resources > Compliance & guidelines > Money laundering & terrorist reporting

Compliance program template

• Customize to your operation• Fields to be customized are in blue• Please make sure you follow the advisor guide and

instructions included in the template in red• Delete instructions (in red) before printing

Risk assessment

• Required to have an assessment and documentation of risks related to ML and terrorist financing appropriate to you

• Refer to the risk checklist in FINTRAC’s Guideline 4. This will help you:– Identify potential high risks of ML and terrorist

financing – Develop strategies to mitigate risk

Compliance policies and procedures

• Show your commitment to prevent, detect and address non-compliance

• Level of detail depends on your– needs and the complexity of your business– risk of exposure

• Review policies and procedures and steps to reporting on the advisor site– Can be adopted and customized

What happens in a FINTRAC audit

1. FINTRAC Compliance Assessment online

2. Contacted by FINTRAC: submit compliance documentation and client files

3. Phone or in-face-audit

4. Describe your policies and procedures in detail

5. Explain the basis for and defend risk assessment

6. Defend self-assessment

7. Hear the critique of your files

8. Exit discussions

9. Follow up letter with deficiencies

10. Need to respond with action plan and dates within 30 Days

11. Fines and follow up audits

What’s ahead?

The impact of recent focus on the MGA world

• The impact of the CCIR papers

• BC’s position (know your advisor)

• CLHIA (standardized MGA compliance review survey)

Global regulatory convergence

• Globalization and increasing concentration within the financial services industry

• 2008 Financial Crisis

• European and U.S. financial instability

Google: YouTube – The Inside Job

What other tools/resources are available

• Code of business conduct and ethics• Compliance: know your obligations• Advisor site• www.clhia.ca/advisors• www.fintrac.gc.ca• www.priv.gc.ca• Advocis• Resources at head office

Market Conduct support

• Earleen Moulton, Manager, Market Conduct, Business Practices Support

• Doug Weir, Associate manager, Market Conduct

• Cindy Raikes and Christine Scaini, Compliance Consultants, Market Conduct