The article “New rules boost financial protection for seniors, but getting them to opt in can be a delicate process” was originally published in Financial Post on July 27, 2021. PHOTO BY CHLOE CUSHMAN/NATIONAL POST ILLUSTRATION FILES.

CSA introduces trusted contacts, temporary holds on transactions for seniors and investors with diminished mental capacity.

The Canadian Securities Administrators (CSA) have introduced a requirement for financial advisers across the country to provide more oversight for seniors and investors with diminished mental capacity. This highlights important issues for retirees, people with aging parents or other at-risk family members and the financial industry — some of which are not addressed by the new provisions.

On July 15, the regulatory organization harmonizing Canada’s provincial and territorial securities regulators made changes to National Instrument 31-103 related to client relationships and business activities for most Canadian financial advisers starting in 2022. According to the CSA, the amendments “will enhance protection of older and vulnerable clients by providing registrants with tools and guidance to address issues of financial exploitation and diminished mental capacity.”

The two main changes are the introduction of a trusted contact person (TCP) and temporary holds on transactions. The TCP will require advisers to try to obtain contact information for a family member, friend, or other trusted party to alert if they have concerns about an investor’s ability to make financial decisions or about their exploitation. The temporary hold policy permits them to delay a transfer or withdrawal from an investment account.

The trusted contact person will not be mandatory to open or maintain an investment account, nor is there an age limit at which the TCP becomes applicable. The amendments may apply predominantly to seniors but anyone at any age who has a mental capacity risk is included.

Nearly 18 per cent of Canadians are aged 65 or older and that cohort controls about 39 per cent of non-pension financial assets. The aging baby boomer population makes this regulation important but also risks offending older financial consumers. It also raises questions about other situations that put seniors at risk and some of the ways to help.

About 47 per cent of senior households are headed by single seniors and more than two-thirds of those are females. Senior women — especially those without children — may be less likely to have a logical trusted contact person like a spouse or a child. Single seniors’ siblings and friends are also likely to be of a similar age. Nieces or nephews could be good trusted contacts but perhaps the biggest challenge for advisers will be starting a trusted contact discussion with an aging client without insulting them.

The Ontario Securities Commission (OSC) did a randomized control trial and found that using behavioural science increased the likelihood a senior would appoint a TCP by 23 per cent. The key elements that helped were making a statement about the prevalence of fraud, stating that most people support the TCP concept, and requiring someone to make an active choice about a TCP. The active choice required an investor to choose between either appointing or not appointing a trusted contact person and select one or the other.

There has been an increase in self-directed investing in recent years, so a lower proportion of Canadians have advisers than in the past. Despite some of the benefits of lower trading commissions, access to do-it-yourself investing platforms, and the increase in exchange traded funds, DIY senior investors lack some of the protection that the CSA amendments provides to advised investors. A 2020 Leger survey for the OSC also found that 27 per cent of investors who have the bulk of their investments with an adviser also have a secondary self-directed account.

Self-directed brokerages could consider algorithms to identify accounts with undiversified holdings, frequent trading, or large withdrawals for investors beginning at a certain age. They could be automatically sent a simple form like the one used in the OSC trial. However, this raises the issue of discriminating based on age for an investor who has decided they want to be left alone to invest on their own in the first place.

Advisers and people with aging family members should be asking seniors about DIY investment accounts. That said, advisers risk being accused of trying to gather more assets, and family members risk being criticized for overstepping.

Another consideration is the significant real estate wealth that is owned by seniors. The Canadian Real Estate Association (CREA) reports that year over year national home prices rose by almost 26 per cent in June. Home equity lines of credit and reverse mortgages enable a homeowner to borrow against their home equity. Proceeds from a real estate sale can be exposed once turned into cash in a bank account. This highlights the importance for banks, the real estate and mortgage industries, and family members to help mitigate financial exploitation of senior homeowners.

The CSA amendments have received support from the financial industry, but consumer protection could be expanded. Most of the industry has opposed a fiduciary standard for financial advisers in Canada that would require them to put their clients’ best interests first. Instead, a suitability standard prevails, with advisers generally obligated to provide advice and products that are simply suitable, which is vague and variable. The result is that seniors may not necessarily be protected by the advice provided by advisers who themselves could be a risk to older and vulnerable clients.

A fiduciary standard could provide more oversight for seniors with advisers as well as other consumers of financial advice to reduce the vulnerabilities that all Canadians face with their finances. Most advisers surely do right by their clients, but if consumers cannot place their full trust for financial advice in financial advisers, who can they trust?

There are many ways that vulnerable people can have their assets put at risk and additional steps that may be necessary to protect them. Guidelines like those from the CSA that apply to financial advisers are a positive step and could be expanded to provide oversight by everyone from bank tellers to other professionals who work with seniors.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.