Protecting Older and Vulnerable Clients

Lesson 1: Background on Vulnerable Clients

Background on Vulnerable
Clients 1

1•3 INTRODUCTION

1•3 REGULATORY OBJECTIVES AND INITIATIVES

1•5 COMMON TYPES OF INFRACTIONS

1•5 SUMMARY OF REGULATORY INITIATIVES

1•6 SUMMARY

1•6 REFLECTIVE QUESTIONS – RESPONSES

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 LESSON 1       BACKGROUND ON VULNERABLE CLIENTS 1•3

INTRODUCTION
Securities regulators in Canada (including the Canadian Securities Administrators (CSA), the Investment Industry
Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA)) and in the
United States have identified vulnerable clients and the importance of supporting vulnerable clients as key issues
that registrants in the financial services industry must be aware of in their day to day operations and practice.
The term “registrant” can refer to an investment dealer, portfolio manager, or other registered entity or its
employee or agent. For the purposes of this course we will refer to client facing employees as “individual registrants”
or “registrants” and entities as “registered firms” or “firms”.
As this specific demographic of individuals progressively lives both a quantitatively and qualitatively longer
life, registrants (both firms and individuals) need to be more mindful of specific financial advice and strategies
associated with aging. These strategies must address the economic needs and challenges faced by vulnerable clients
from living longer, such as reduced or diminished capacity, or financial exploitation by others.
By the end of this lesson you will be able to:

• Define the terms vulnerable client and financial exploitation.

• Summarize the regulatory initiatives that are designed to enhance protection of vulnerable and elderly clients
including the concepts of trusted contact person and temporary holds.
• Discuss the role registrants play when dealing with vulnerable clients.
• Identify infractions when dealing with vulnerable and elderly clients.

REGULATORY OBJECTIVES AND INITIATIVES

Given the important role they play with respect to the financial health of all clients, registrants and the firms
they are affiliated with are uniquely positioned to play a critical role in the detection and mitigation of issues
that vulnerable clients may be exposed to and may in fact be the first to notice issues associated with diminished
capacity, financial exploitation, and general vulnerability.
Given their proximity to their clients and (in certain instances) the duration of client relationships, the registrant
is in a key position to detect subtle changes in client behaviour, investment strategies and objectives, and other
changes to mental state that may signal client distress or worse, financial exploitation, which is on the rise for
elderly and otherwise vulnerable clients.
In addition, the registrant and firm will seek to properly document all interactions with clients well in advance of
these issues arising so that if issues do emerge, they are prepared to deal with them in a timely way while continuing
to service the client’s account.
While some of these issues are universal, such as Know Your Client, regular updates, suitability, Know Your Product,
and effective communication strategies, others are unique. These include establishing a “trusted contact person”
and “temporary hold periods” on certain transactions. All registrants need to be mindful of the delicate position
they are placed in when a client is adjudicated to be vulnerable and whether registrants are in a position to seek
“safe harbour” for their actions (which may include not acting in accordance with client instructions).
These issues have recently been significantly re-enforced as part of the regulatory amendments contained in the
CSA’s client focused reforms (CFRs), which in large part were universally adopted by IIROC and the MFDA. These
amendments emphasize the importance of registrants knowing their clients and taking reasonable steps to collect
information relevant to the client’s investment needs and objectives, personal and financial circumstances, and any
other information necessary to ensure that investments made by the client are suitable.

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1•4 PROTECTING OLDER AND VULNERABLE CLIENTS

You can find more information about the CSA’s client focused reforms here:
https://www.osc.ca/sites/default/files/pdfs/irps/ni_20191003_31-103_reforms-enhance-client-registrant-
relationship.pdf

Determining who is considered “vulnerable” will ultimately drive the application of these additional policies and
procedures. It is clear that vulnerability is not necessarily equated to being elderly and for these reasons registrants
must be mindful of how they approach any client who may appear to be in distress or in need of assistance.
The CSA defines a vulnerable client as someone who has an illness, impairment, disability, or aging process
limitation that places the client at risk of financial exploitation. Financial exploitation is generally described as the
use, control, or deprivation of financial assets through undue influence or unlawful conduct. The ability to observe
and detect a change in long standing client behaviour is key to being able to support clients who may fall into this
category.
Following the release of the CFR proposals in 2019, the CSA further reinforced these concepts with the release of
additional proposed amendments to National Instrument 31-103 (31-103) in March 2020, which deal specifically
with supporting the CSA’s initiative to “enhance investor protection by addressing issues of financial exploitation
and diminished mental capacity of older and vulnerable clients”.1
On July 15, 2021, the CSA, as part of the CFRs, published its final amendments to enhance protection of older and
vulnerable clients, reaffirming the this conclusion that has appeared in previous notices:
Canadians are living longer than ever before, and older Canadians are increasingly making up a greater
proportion of the total population. As investors live longer, there is a greater need for targeted financial
advice and strategies associated with aging, as well as the need to be more attuned to the sometimes-subtle
changes clients may present as they age.
The CSA recognizes that older clients are not a homogenous group and that not all older clients are
vulnerable or unable to protect their own interests. Vulnerability can affect a client of any age, take many
forms, and can be temporary, sporadic or permanent in nature. Vulnerability can be caused by a number of
factors, including a physical, cognitive or psychological limitation, an illness or injury.
With the final amendments, the CFRs outline changes to overall registrant conduct to better align the interests of
registrants with their clients, improve client outcomes, and make clearer to clients the nature and terms of their
relationship with registrants (both firm and individual). While these principles broadly apply to all clients, there is
a heightened sensitivity to vulnerable clients, and firms must have an overall approach to the issue of managing
vulnerable clients.
As noted by the Ontario Securities Commission in OSC Staff Notice 33-749 Annual Summary Report for Dealers,
Advisors and Investment Fund Managers (published August 23, 2018)2:
Staff conducted a focused sweep and approximately 90% of the firms reviewed did not have any written
policies and procedures for dealing with seniors and vulnerable investors (for example investors with
diminished capacity, severe or long term illness, mental or physical impairment, language barrier).
Although the majority of firms were aware of the challenges associated with servicing senior clients, they
had not established any written procedures or guidelines nor provided any training programs to their staff
on how to identify and address issues such as potential financial abuse, diminished mental capacity and
the misuse of a power of attorney (POA). As well, the firms did not have a clear definition of what they
considered to be a senior or vulnerable client.

1
https://www.osc.ca/sites/default/files/pdfs/irps/csa_20200305_31-103_protection-older-vulnerable-clients.pdf.
2
https://www.osc.gov.on.ca/en/SecuritiesLaw_rule_20180823_annual-summary-report-for-dealers.htm

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 LESSON 1       BACKGROUND ON VULNERABLE CLIENTS 1•5

Reflective Questions
Why is your role so important in detecting and mitigating the challenges faced with vulnerable clients?

COMMON TYPES OF INFRACTIONS

As we discuss throughout this course, registrants need to have a heightened sensitivity in their dealings with
vulnerable clients. With respect to elderly clients, many will rely on their investments to supplement retirement
income, investments that will be difficult to recover from financial losses given the client’s shorter time horizon.
Some registrants, however, rather than protecting these clients take advantage of the fact that vulnerable clients
may have complete reliance on them on financial matters. This may be due to the client’s limited investment
knowledge, a long-standing relationship, and a change in circumstances (i.e., becoming a widow). Sometimes that
vulnerability may be the result of cultural issues that give deference to the registrant.
In 2020, a quarter of all completed IIROC prosecutions against individual registrants and firms were related to
issues around elderly and vulnerable clients. Similarly in 2020, 30% of the MFDA’s commenced proceedings
involved elderly or vulnerable clients.
The most common types of infractions related to vulnerable clients include:

• Unsuitable investment advice, particularly the use of higher risk investments to boost client income.
• Account application updates to justify trading.
• Investment objectives that benefit the estate instead of the client.
• Accepting trading instructions for a client’s account from a family member without receiving authorization from
the account holder or an appropriate POA.
• Accepting loans or gifts from clients.
• Accepting executor power from clients.

SUMMARY OF REGULATORY INITIATIVES

The recent CSA, IIROC, and MFDA regulatory initiatives discussed in this course are summarized below:

• Registrants should take reasonable steps to add a trusted contact person (TCP) to a client file, including how
this person is monitored and in what circumstances they can be contacted.
• In carrying out enhanced Know Your Client (KYC), Know Your Product (KYP), and suitability determinations,
registrants must pay particular attention to vulnerable clients.
• Registrants must be able to identify red flags that may indicate diminished capacity, financial abuse, or misuse
of a power of attorney (POA).
• In what circumstances registrants can place temporary holds on the purchase, sale, withdrawal, and transfer of
cash or securities from a client’s account.
• Special considerations for communicating with vulnerable clients (particularly during onboarding of a client) or
marketing to these clients.
• From the firm’s perspective, providing policies and procedures related to escalation and complaint handling
that best fits with the firm and its client base, as well as a training program to help individual registrants protect
vulnerable clients (and the firm).

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1•6 PROTECTING OLDER AND VULNERABLE CLIENTS

It is from this perspective that we now examine the current guidelines and expectations that have been recently
outlined by IIROC, the MFDA, and the CSA.

Reflective Questions
What are some of the common types of infractions?

SUMMARY
Based on recent regulatory initiatives, registered firms and their individual registrants will increasingly need to be
more mindful of the financial advice and strategies provided to vulnerable and elderly clients. This involves the
understanding of how to identify vulnerable clients, heightened sensitivity to KYC and KYP rules for these clients,
and the use of trusted contact persons and temporary holds where warranted.

REFLECTIVE QUESTIONS – RESPONSES

Why is your role so important in detecting and mitigating the challenges faced with vulnerable clients?
The regulatory amendments coming into force, as part of the CSA’s broader client focused reforms initiative,
emphasized the important role all registrants have in knowing their clients. Registrants are in a unique position
to recognize or first notice issues associated with diminished capacity, financial exploitation, and general
vulnerability. And in particular, given the often long duration of a client relationship, registrants are in a
position to detect subtle changes in behaviour that may signal client distress or worse, financial exploitation.
Consequently, properly documenting all interaction with clients well in advance of issues arising will certainly
help the registrant deal with such issues if and when they emerge.
What are some of the common types of advisor infractions?
It is worthwhile noting that in 2020, a quarter of all completed IIROC prosecutions against individual registrants
and firms were related to issues around elderly and vulnerable clients. Some of the more common types of
infractions related to vulnerable clients include unsuitable investment advice, account application updates that
justify trading, accepting loans or gifts from clients, and accepting executor power from clients.

© CANADIAN SECURITIES INSTITUTE (2021)