FOCUS 2026: Regulatory session

Andrea Rigobon: Hello Scottsdale. We've got to get this end of day energy up. Like always, I got the best topic to do that. I think earlier today the Davids said there were two big themes that were impacting the economy. Similarly, there are two big themes I want to start with that are impacting the regulatory landscape. A couple weeks ago I met the OSC Dialogue. For those of you who don't know the OSC Dialogue is a conference where the regulator invites the industry and they do a full day of regulatory sessions on key regulatory topics. It's thrilling. I tell you this because this year, this year the main theme of the conference was competitive edge, competitive edge. Really good. In today's geopolitical environment even the regulators are realizing that they play a pivotal role in keeping our markets competitive. In fact, the OSC, part of its mandate is to foster competition. They've actually not proceeded with implementing certain regulations because they knew it would put us at a competitive disadvantage to our neighbours in the South. How about that?

Those are climate-related reforms if you want to look that up. That's one big theme. That means new regulations, really at the behest of the government, are going to have to be looked at through this lens of are they going to keep our markets competitive? Regulators also have another mandate. Investor protection. You're familiar with this one. CRM3, the Client Focused Reforms, these are initiatives pursuant to that mandate that they've leaned in heavily to. We are seeing a change, a change of where they perceive harm. They are realizing that there is a lot of harm being created online, namely with finfluencers or with new technology like AI, the use of AI. There's an acute awareness that's emerging that they are safest, and when I say they, investors, when they are investing with registered professional financial advisors. All of you. The wind is blowing in the right direction.

I'm going to get into the goods now. CRM3, I've probably spoken to thousands of advisors on CRM3. I'm still getting weekly requests. It's a real hot topic. I'm going to give you just a brief summary for those of you who don't know what CRM three is exactly, and then I want to propose something to you. I want you to buy into my message around CRM3. The summary is CRM is about disclosing investment fund fees in addition to dealer fees on client account statements. When I say investment funds I mean retail mutual funds and ETFs. In terms of fees we're talking about the MER and the TER being used to come up with a dollar figure for investment fund fees. That dollar figure will be amalgamated across all funds held in the account and combined with the dealer fees to come up with the total cost of investing. Many of you know this. That fund expense ratio, which is the sum of the MER and TER, will be set out in percentage terms by series. CRM3 in a nutshell.

What I really want to talk about, there's been a lot of focus on cost and fees when it comes to CRM3. What I want to suggest to you is the focus should not really be on cost or fees but on value. There's only an issue with fees where value is not clearly articulated. Let me give you some examples. This is my favourite one. You can go online and you can download a will kit, or you can hire a lawyer who's been practicing in wills and estates for 20 years. There's a difference there. You can do your taxes yourself, or you could hire a CPA who has experience in estate planning. You can watch a YouTube video, five minute YouTube video and try to fix your dishwasher on your own. You can listen to your wife the first three times and call someone. That one was for my husband. I had to, I'm sorry. But you get where I'm going here.

It's about value. I'm a lawyer in asset management. I'm smart enough to know that I'm not smart enough and not organized enough to manage my own money. I pay for financial advice because I know I'm going to be better off if I do. Obviously, I'm biased. I've seen all the great research that shows that people retire wealthier when they have financial advisors. If you do have those clients that look at these statements, because I've talked to a number of advisors that say my clients are not looking at these statements, they trust me, I disclose fees, this is a non-issue for me, but if you have clients that are really fee-sensitive, are looking at these statements, you're going to have to articulate your value.

What does that look like? Well, clients have options just like you purchase any good or service. They can do it themselves. They can rely on the advice of a finfluencer. They can buy the lowest fee product. But what's the value there and what's the outcome versus what they're getting here? I would submit to you that they're going to be better off going with this option than with going with this option. Let's put CRM3 in perspective, into perspective, and focus on what's really important here, that's all the value you're going to be offering to your clients. Lastly, research shows, there's some really good research that shows that where there isn't fee transparency consumers overestimate the fees they're paying. Greater fee transparency may be a good thing.

The Client Focused Reforms, we're four years out now from the implementation of the Client Focused Reforms. For those of you that don't know what the Client Focused Reforms are you will know that within the last several years you've had to document more, you've had to compare more securities, your compliance burden has increased. I see people nodding their heads. I know you're feeling it. The regulators went out and they audited over a hundred firms, looking at whether they are complying with the enhancements that came about as a result of the Client Focused Reforms. Late last year they issued some guidance. Stay with me. This is the drier content but it's really important. We'll get to finfluencing and AI in a couple slides.

What did the report say? I pulled out all the key pieces of information that you need to know as financial advisors. Where did advisors get it wrong when it came to complying with the Client Focused Reforms? You might know that there's a new requirement to create a risk profile for your client. The risk profile contains two elements, risk capacity and risk tolerance. Likely your dealer's forms have been updated and you are assessing these two elements. What did the regulators find? That some advisors had not assessed these elements separately. What do they expect? When you look at risk capacity, that's an objective measure, the client's ability to withstand loss. You're looking at other KYC information, their net financial assets, liquidity, investment time horizon, can they withstand losses and what should the risk level be here? On this form we have the risk capacity at medium.

Then you look at risk tolerance, and risk tolerance has traditionally been in the rules and that's the client's attitude towards risk. When you have a meaningful discussion with them about how much risk they want to take on you're going to be assessing what the risk tolerance is. It's more of a subjective measure. Then you come up with a risk there. The overall risk profile is the lower of the two. If you have medium and high, the risk of the client is medium. Some other findings around KYC, regulators found that in some circumstances advisors had not collected enough information about the client's financial circumstances. An example they give is in these KYC forms dealers often use some asset range checkboxes. There can be an asset range of one to five million. If the investor is investing 400,000 with you, 400,00 of 1 million is very different than 400,000 of 5 million. In some cases you need to get more specific information about your client's net financial circumstances. Specifically, if they're investing in anything that's illiquid or riskier you wanna know the full picture, okay?

The last thing that came out of this guidance paper when it came to your KYC responsibility is that some advisors when they were updating the KYC took the original form and just wrote on it 'no updates'. Client Focused Reforms specified in non-managed accounts you've got to  update KYC every 36 months or on a significant change. When you're updating it you want to have a meaningful interaction with the client, figure out if the personal circumstances change, figure out if their financial circumstances change and document that you actually had that discussion. No updates is not going to cut it.

The last thing with KYC, the rules say you've gotta get clients to sign off on KYC and any updates. Now, signing off will mean different things for different dealers so follow whatever your dealer tells you to do. If they want a client signature get the client signature. Notes in a file might be okay for some dealers. Let's move on to suitability. In the rule suitability is actually five things you need to consider. Advisors were doing the first two. They looked at KYC, they looked at KYP as part of their suitability determination. The regulators found that the other three elements were missing in some cases. You've got to look at concentration. When I recommend a security to the investor are they going to be over concentrated? That's just one other element in the rules. The reasonable range of alternatives. I'm sure you're familiar with this. Follow what your dealer says. If your dealer says compare three, have notes for comparing three securities. Then cost, you make sure costs are appropriate and then you recommend something to your clients.

On the KYP front we know that dealers have a responsibility to assess and approve securities at the top of the house. Then advisors have an individual KYP responsibility. In some instances advisors couldn't show documentation of their individual KYP but what that responsibility is varies depending on what your dealer's model is. Regulators found that some dealers had an approved list and advisor wasn't documenting their review of securities at all because the dealers had this approved list. Follow what your dealer tells you to do. Obviously, most of you know the securities that you recommend, you've just got to make sure that you're documenting that.

The Client Focused Reforms and proper documentation, let's say you're documenting something and maybe your documentation is not perfect and you compared fund A to fund B and you didn't look at all the structures, features, risk, you're likely not going to end up in enforcement. What I wanted to do, what I thought would be helpful, is if I figured out what are the key risk areas so that when you run your practice you can over document in these areas to protect yourselves. Where are regulators enforcing against advisors? I went on CIRO's web page and I did this the old school way. I didn't use AI. I looked up all the cases and I tried to identify themes. There are some themes that emerged that I'm going to share with you.

First theme, anything with ageing investors, if you're acting on a power of attorney. I know you're sitting there thinking regulators think an ageing investor is a six-year-old and this person is going to be working for the next 20 years and they have the financial assets to justify the higher risk. All I'm telling you is document that your decision was reasonable and that you looked at the KYC information and you found that the recommendation was supported by the information you had on the client. Really important. Ageing investors, over document.

The second thing that shows up in enforcement a lot, complex securities. I cannot tell you how many cases I saw where advisors were writing options, client lost money and they end up in enforcement. Doesn't mean you can't write options, doesn't mean that you can recommend derivatives, document. In these circumstances with less liquid securities, more complex securities, you want to go back to that KYC and you might need to understand assets outside the firm and liabilities outside the firm so you know the client is going to be okay. These are the cases that are ending up in enforcement.

We talked about ageing investors, we talked about more complex securities, the third thing I see a lot of is concentration. I can't tell you, again, how many cases ended up in enforcement because an advisor recommended a security, the client was over concentrated, security went bust, client lost money, and there you go. Some clients even litigate, it's horrible. Anything around concentration, you might really like something, it might be appropriate, again, tie it all together, have the notes, they're going to protect you.

It's me! You think it's me? She looks like me. I can tell you, I've heard her, she sounds like me. She even flaps her hands around like I do when I talk. You might have guessed it's actually not me. In some ways she's better than me. She speaks multiple languages and I, well, regrettably, I only speak one. This is my AI avatar. Pretty neat. What do the regulators think about AI? The securities regulators actually issued a guidance paper on the application of securities law to AI use. In the guidance paper they say that they think AI is going to make KYC, KYP and client onboarding way more efficient for advisors and dealers. They also say that AI has the potential to improve investment recommendations. They're supportive. I think the good is that ultimately AI can be used to minimize the compliance burden. The good of AI.

Now, with the good sometimes comes the bad but in this case it's that regulators acknowledge that AI certainly comes with risks. They say that firms need to have governance structures in place to identify those risks and to mitigate them. That would mean that before your dealer brings on AI, like any other technology, they review it, make sure that client information will be safeguarded, that the AI output is accurate, transparent, explainable, and unbiased. Then when your dealer onboards the solution you can then use it. It's like other technology. You know this, you can't put client information into your personal ChatGPT. Use the AI that the dealer provides to you, or that has been vetted appropriately.  Regulators have some guidance around what dealers need to do in that respect.

That's kind of the bad. The ugly, I think everyone right now is familiar with the ugly. AI is allowing fraud to be hyper-personalized. Gone are the days where we're receiving emails from the deposed king of some foreign country and it's clear that it's fraud and we delete the email. AI is perpetrating fraud in a very sophisticated level. We've heard about all these cases with deepfakes. They can record seconds of your voice and replicate it. It's pretty scary. I want to go through an example of a case you might be familiar with because I think there are some good learnings in this case for us all. Have you heard of the case with the Ferrari CEO? Yeah, some of you are nodding. Pretty cool. Let me tell you about this.

Malicious actor goes on WhatsApp, takes the picture of Ferrari CEO, puts it on WhatsApp and starts to message an executive at Ferrari. Hey, I'm messaging you from this number because there's this huge confidential deal we're working on. Obviously, this is going to try to get this person to sign off on something, probably transfer funds. He then gets on the phone with the executive and he perfectly replicates the Ferrari CEO's Southern Italian accent. He's trying to convince him this is, in fact, Ferrari CEO. What happens? Well, this executive was very smart. Before acting on instructions what did he do? He asked the Ferrari CEO what was the book, the last book I lent you? Malicious actor didn't have that information, the fraud wasn't able to be perpetrated. Really important.

It's important for us to know this because we're in financial services. You act in a position of trust for your clients, you deal with financial assets so it's important to understand the hallmarks of AI fraud. We actually have a webcast on this on fidelity.ca where I talk to an expert in this so if you're interested you can go and see it. It's importance to be vigilant, it's important to follow process and where something seems fishy, ask those questions.

Finfluencers. The regulators are finding that investors are increasingly relying on finfluencers to make financial decisions. In fact, one OSC study found that 35% of the investors surveyed admitted that they made a financial decision based on the advice of a finfluencer. Listen to this. Those people that relied on the finfluencer were 12.2 times more likely to be scammed online. This is a big investor protection problem and the regulators are very focused on this. What did they do? What did the regulators do? Well, in true regulatory fashion they issued a guidance paper. Application of securities laws to finfluencing, essentially saying, hey, finfluencers, guess what? There are all these laws that apply to you and you need to know about them or else you're going to get in big trouble. That's what this paper essentially said.

What are these laws? You guys know, you've got to be registered to provide financial advice. You can't just be out there giving financial advice to everyone. I have financial advisors ask me, well, then how is that possible that all these people are online giving financial advice?  Your beauty influencer wakes up one day and she decides she's going to give financial advice. The answer to the question is that there is an exemption in securities laws. If your advice is generalized in nature and it's not tailored to a specific individual you do not need to be registered. You do not need to be registered. You can give generalized advice but, but, you do need to disclose whether you have financial interests in any of those stocks that maybe you're promoting as a finfluencer. Finfluencers have gotten themselves in big trouble in not doing so.

I'll give you an example. There was a young man in Alberta. He went by the handle Jakeconomics. Alberta Securities Commission fined him $40,000 for not disclosing that he was being paid to promote four stocks. The regulators are looking into this activity. In fact, there was a global week of regulatory action against finfluencers where our regulators, Ontario Securities Commission, the AMF in Quebec, B.C. Securities Commission, got together with foreign regulators. The RCMP was involved because this is a cross-border issue, and they issued cease and desist letters, told finfluencers they have to take down all kinds of content, really laying the groundwork for future enforcement. The key here is that regulators are all over this and that they know that there is a lot of investor harm that has the potential to be caused. Again, what I mentioned at the beginning, they realize that investors are safest when they are investing through registered professional financial advisors. Really good, and it's great that they are targeting some of the harms that are occurring online.

Advisor incorporation, I do have an update for you. I've been mentioning that CIRO has taken up this issue. They've come up with a model, the incorporated approved person model. Essentially, it's like a professional corporation, similar to a lawyer or a doctor. They brought this model to the CRA and asked them some questions. What I heard is that the CRA essentially said, this is not an issue for us. There is a professional corporation model, we treat it a certain way, but your rules need to allow for it. Now CRO, the regulator, has gone to the Provincial Securities Commission and brought their proposal forward to see if we can get some rule changes. I've heard that there's some disagreement between the Securities Commission based on the mechanics of the proposal so the publishing of the proposal for industry feedback has been delayed 9 to 12 months but we will see an outcome here. We will likely see the ability for all advisors on both sides of the house and across the country to incorporate. It will be in the form of a professional corporation. Stay tuned, when there are updates on this I'll be out there speaking about them. You can always contact me if you're looking for updates.

Very exciting, CE credits. We've taken your feedback and made some changes to our dashboard but before I get into that, a shameless plug, like I mentioned, we have some really great content on fidelity.ca. We're always thinking about keeping this interesting for advisors and getting you CE credits. I encourage you to go on fid.ca and check out some of our videos to get CE credits. In terms of our dashboard, how do you get there? fidelity.ca, behind the login, you want to navigate to for advisor and then CE credits. You'll get this wonderful dashboard and it can filter by governing body and see how many credits you actually need from that governing body and how many you've earned through attending Fidelity sessions. Today you're earning CE credits, we're going to submit for them, so those credits will show up as pending until they've been awarded and then they'll show up in the dashboard.

The change that we made is now you'll be able to run a really robust report on type of CE credit by type of CE credit or governing body. You'll get all the information you need on the page to submit this to the regulators so you don't have to sift through PDFs. I encourage you to go check out our CE credit dashboard if you haven't seen it  and certainly provide us with your feedback. We're always looking to make things better for you. As always, it's been an absolute pleasure speaking with you here today. I encourage you, I'm going to be around for the rest of the conference, please come up to me to speak about all things regulatory. If you know someone who can fix my dishwasher, happy to chat with you. Here's a message for our French speakers.

[French] This was a real pleasure to be here with you today in Scottsdale. I hope you found my presentation interesting. I will be present for the rest of the conference so do not hesitate to come and see me to discuss everything related to regulation.