Regulators will review “a sizable number” of firms, a panellist said at KYP webinar
In the coming months, firms and advisors can expect their processes for know-your-product (KYP) and suitability to undergo regulatory scrutiny, industry panellists said Thursday at a webinar hosted by regtech firm InvestorCOM.
The client-focused reforms (CFRs), in full effect since the beginning of the year, include enhanced KYP and suitability requirements for firms and advisors. Firms must formally assess and monitor products, and advisors must demonstrate KYP proficiency and consider a reasonable range of firm-approved products before making a recommendation.
In the years leading to the reforms, regulators had investigated advisors for failing to fulfil their KYP obligations, said panellist Richard Rizi, senior director of investment services with Worldsource Wealth Management in Markham, Ont.
With the reforms making those obligations explicit, “we know that the number of investigations around KYP, or the lack of it, is only going to increase,” Rizi said.
The situation highlights the importance of dealers’ KYP obligations, as a responsibility toward advisors, he added.
Panellist Nancy Mehrad, founder and CEO of Registrant Law, said regulators will spend “the next little while” assessing how advisors and firms have implemented the reforms and whether that implementation conforms to expected results.
A regulatory sweep will be conducted on “a sizable number of firms,” Mehrad said, noting that testing for the conflicts-related reforms is already underway.
What’s expected from registrants is “good faith efforts to comply,” she said, not perfection.
Following the sweep, the regulators will issue guidance to provide registrants with greater clarity. As best practices are delineated, firms and advisors should expect that they may need to revise their processes, she said.
Mehrad also noted that CFR Phase 2 remains on the regulatory agenda: “You’ll see more on referral arrangements, proficiencies and titles,” she said. “CFR is here to stay.”
Panellists discussed various other issues that firms and advisors are facing as the KYP reforms are implemented.
Rizi noted that dealers’ responsibility to monitor products and myriad changing data points associated with them will result in a more quantitative approach to fulfilling KYP obligations, using data such as MER, Sharpe ratio and performance. These will accompany traditional qualitative data, such as a manager’s experience with an investment strategy.
Both dealers and advisors must have a deep knowledge “of the data that forms the central thesis for a product recommendation,” Rizi said.
With advisors, his overall KYP focus is on training and consultation. KYP reform “is not a one-way street,” Rizi said. “You have to listen to the end user, which in this case is advisors.”
At his firm, for example, advisor feedback about wanting to view a greater number of product-comparison results led to parameter changes. (The firm uses InvestorCOM’s PeerCompare platform.)
Mehrad cited the challenge of keeping a record of advisors’ consideration of a reasonable range of products ahead of making a recommendation. “Firms have had to take really big steps […] to make sure their [advisors] are equipped with the tools to satisfy their record-keeping requirements,” she said. Establishing a documentation process and testing it will ensure advisors are meeting the requirement, she said.
Many firms use tech to comply with the reforms. A “digital first” approach that’s scalable and agile will be increasingly necessary as regulatory obligations evolve and products become diverse, said panellist Justitia Pak, implementation consultant, digital compliance initiatives, with BMO Investments.
As such, he suggested to firms that they “bake technology and digital change into your DNA as an organization.”
Source: Investment Executive