topics of interest & risk in our industry today
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Topics of interest & risk in our industry today. Christine Scaini Compliance Consultant, Market Conduct. April 2013. Agenda. Appreciating regulation in our industry Managing conflicts of interest Client file/documentation Privacy The fight against money laundering What’s ahead. - PowerPoint PPT PresentationTRANSCRIPT
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April 2013
Topics of interest & risk in our industry today
Christine ScainiCompliance Consultant, Market Conduct
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Agenda
• Appreciating regulation in our industry• Managing conflicts of interest• Client file/documentation• Privacy• The fight against money laundering• What’s ahead
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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
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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
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MANAGING CONFLICTS OF INTEREST
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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
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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
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Product suitability issues
• Seg vs. mutual funds
• Insurance as an investment
• Leveraging
• Sales to seniors
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Base product – choose what’s best for your client’s needs
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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
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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)
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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?
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Sales to seniors
• Fast growing demographic
• Loss of ability to “doubt”
• Common reliance on trusted advisor
• Priority for regulators
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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
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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)
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THE CLIENT FILE
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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 …
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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
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PRIVACY PROTECTION
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Privacy protection – legal framework
• Federal privacy legislation (PIPEDA)
• Some provinces have their own privacy legislations (PIPA), substantially similar to federal legislation
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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
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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
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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
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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
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FIGHT AGAINST MONEY LAUNDERING AND TERRORIST FINANCING
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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
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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
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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
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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
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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?
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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.
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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
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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
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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
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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
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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
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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
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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
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What’s ahead?
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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)
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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
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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
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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