Protecting older investors through a regulatory safe harbour

A safe harbour provision is necessary to ensure advisors act in their clients’ best interests

Guest column for Investment Executive

By: Paul Bourque, President and CEO, The Investment Funds Institute of Canada

The client-advisor relationship is built on trust that the advisor will at all times serve and protect their clients’ interests. Advisors often deal with clients over the long term, and the needs of those clients can change at different life stages. When an advisor is concerned that a client is at risk due to diminished mental capacity or potential financial exploitation, it is crucial that the advisor and their firm take measures to safeguard the client’s assets.

According to Statistics Canada, there could be more than 10 million seniors in the country by 2036. This growing population is vulnerable to financial exploitation. In fact, financial abuse is one of the most common forms of elder abuse in Canada. Unfortunately, most cases of financial fraud committed against seniors involve friends, family and caregivers. Cognitive decline can also pose a risk to senior investors’ financial security.

Advisors who have worked with a client over the course of several years may notice signs of financial exploitation or cognitive decline such as unusual fund transfers, the sudden appearance of someone previously uninvolved presenting a power of attorney, or instructions that are inconsistent with an existing financial plan.

The Investment Funds Institute of Canada (IFIC) has advocated over the years for reforms to help protect older investors and their advisors in these situations. In a recent comment letter to the Canadian Securities Administrators (CSA), we voiced support for provisions that would permit firms to impose a temporary hold on implementing instructions received from a client. The temporary hold would allow the advisor and the firm to investigate whether the instructions are valid or if they are the result of financial exploitation or diminished cognitive ability. The firm must revisit the decision to place a temporary hold every 30 days until a final determination is made, and the client must be notified at the time the hold is imposed and every 30 days thereafter.

We also made a specific recommendation to provide a safe harbour for advisors and dealers who rely on the ability to place a temporary hold when acting on client instructions. We believe that without a safe harbour, very few advisors and firms would rely on the temporary hold provisions. Should there be a decline in asset value between the imposition of the hold and its removal, for instance, the advisor and firm could face the risk of litigation, even though they acted reasonably and followed regulatory requirements. A safe harbour would enable advisors to act confidently in their clients’ best interests without fear of negative consequences.

The determination of financial exploitation and diminished mental capacity is challenging. IFIC has recommended that the CSA, in partnership with elder law experts, develop a course for advisors to ensure that there is a consistent national understanding of these important topics. A course of this nature would further enable and empower advisors to recognize signs of financial exploitation and diminished mental capacity in their older clients, and to take action to protect them.

We commend the CSA on their efforts to protect older and vulnerable investors. With an aging population, this is an area of growing importance to the investment funds industry. We hope our recommendations will help to move the needle on regulatory reform and ensure that senior investors receive the best possible service and support from their advisors.