Personal Finance

Regulations needed to empower advisors to intervene, report urges.
By Rudy Luukko | 27/11/17

Regulators need to do more to help financial advisors who want to protect their most vulnerable clients from being exploited or cheated, according to a joint report by the investor-advocacy organization FAIR Canada and the Canadian Centre for Elder Law (CCEL).

About the Author
Rudy Luukko is a freelance writer who contributes to Morningstar.ca on topics involving fund industry trends and regulatory issues. He retired in May 2018 from his position as editor, investment and personal finance, at Morningstar Canada, where he had worked since 2004. He has also worked as an editor and writer for various general, specialty and institutional media, and he has co-authored courses for the Canadian Securities Institute. Follow Rudy on Twitter: @RudyLuukko.

The report points to shortcomings in protection for vulnerable investors, most of whom are elderly, and who are subject to undue influence or have diminished mental capacity. The most common perpetrators are family members, friends and caregivers.

Through generic "case studies," the report cites six common types of abusers and scammers who prey on vulnerable investors. One of them is the new, younger "best friend" who insists she has a valid power of attorney and instructs the advisor to start selling the client's investments and cashing them out.

Another example is that of a dependant live-in adult son who has a history of substance abuse. He convinces his mother, who has mild dementia, into withdrawing from her account to finance the son's start-up business.

The co-authors -- FAIR Canada's policy director and chief operating officer Marian Passmore and CCEL staff lawyer Laura Tamblyn Watts -- also give generic examples of rogue advisors and scam artists. But their report focuses primarily on how best to support advisors who want to act in the best interests of their vulnerable clients.

Released on Nov. 16, the report has been submitted to securities regulators, governments and various organizations and individual participants that took part in the authors' extensive consultations. Passmore told Morningstar that the report's findings and recommendations may also help individuals consider what type of arrangements they should put in place to help protect themselves, given their particular circumstances.

For instance, says Passmore, investors should weigh the risks and benefits of granting powers of attorney for property in connection with their investments. They may also wish to formally designate a trusted contact person, as recommended in the report, though it isn't common industry practice to make this particular arrangement.

Because of the regulatory gaps that they have identified, Passmore and Tamblyn Watts say that advisors who want to protect their clients are placed in a "damned if they do, and damned if they don't" dilemma. If they don't report suspected financial abuse, their client may suffer irreparable harm. But if advisors do report their concerns, they may face regulatory sanctions for not following client instructions or for breach of privacy, or they risk being sued.

"A representative or staff member who observes signs of elder financial abuse or undue influence, or diminished mental capacity, may want to assist and/or take protective action, but be unsure about whom to contact, his or her authority to act, and the legal ramifications of notifying others or not following the client's disbursement instructions," the report says.

Depending on the situation, an advisor may want to notify a person close to the client, report a suspected abuser to the authorities, or prevent the disbursement of funds from a client's account. But according to the report, "Canada's securities regulatory regime does not equip representatives to protect vulnerable investors in these ways." For that, the authors blame inadequate advisor training on mental capacity and undue influence, unclear reporting requirements and processes, and insufficient regulatory guidance and protection for advisors who want to take protective action.

Financial abuse may often be linked to other forms of abuse or neglect. And since seniors represent a growing portion of the population, the problem is growing. However, the authors note that age alone does not define vulnerability, since most Canadian seniors live independently and are capable of making their own decisions.

To protect those who are vulnerable, the report makes six recommendations for regulatory reforms:

  1. Require investment firms to make reasonable efforts to obtain from each client the name and contact information of a "trusted contact person." The advisor would be authorized to contact this person in the event that there is suspicion of abuse or diminished mental capacity. This provision would apply only if the trusted person was not the one being suspected of wrongdoing. If the client didn't name a trusted contact, there would be no obligation on the part of the advisor.

  2. Allow authorized individuals within an investment firm to place a temporary hold on trades and disbursements from the account when there is a reasonable suspicion of financial abuse, or when the client has lost the capacity to provide instructions. Legal responsibility for the temporary freeze would rest with the firm, rather than individual representatives or staff, the report said.

  3. Provide a "legal safe harbour" for financial-service providers who reach out to appropriately report suspicions of financial abuse or mental incapacity. This protection would apply to advisors who act in good faith and exercise reasonable care, the report said.

  4. Create a "conduct protocol" that defines key terms and sets out the steps that firms and individual representatives should take to identify and protect vulnerable clients. The report recommends that the reporting of suspected financial abuse to the appropriate securities regulator be made mandatory.

  5. Make education and training mandatory for all investment firms in the areas of elder abuse, undue influence, mental-capacity issues, enduring powers of attorney and ageism. Guidelines, such as the best-practices document distributed in May 2016 by the Investment Industry Regulatory Organization of Canada (IIROC) on dealing with vulnerable seniors, are not enough, the report said. It called for specific, enforceable legal measures.

  6. Require investment firms to become familiar with outside resources and responders and learn how and when to appropriately refer a case of suspected elder financial abuse, undue influence or diminished mental capacity.

The authors caution that their recommendations may have limited application to discount brokerages, which provide only order execution, and to online investment advisors, also known as robo-advisors, with which investors may have little or no personal interaction. "We recommend that regulators should undertake separate consultations with these firms, their clients, and other stakeholders to understand what role these firms can play in protecting vulnerable investors, and how technology might be harnessed by these types of firms to protect vulnerable investors."

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