Client Discovery, Suitability, and the Client Relationship
What this domain tests
The KYC-to-suitability chain: gathering accurate client information, knowing the product, matching the two, and documenting the decision. Regulators test this domain heavily because most enforcement actions originate here.
Core rules
- KYC elements under NI 31-103: identity, financial circumstances (income, net worth, assets and liabilities), investment knowledge, risk tolerance, investment objectives, time horizon, and any unique circumstances such as liquidity needs or restrictions.
- KYP: the firm must understand each product's structure, risk, cost and liquidity before recommending it.
- Suitability determination is required before a trade, when the client's circumstances change materially, and at least annually on review.
- Risk tolerance is the client's willingness to accept volatility; risk capacity is the financial ability to absorb loss. They can diverge, and the lower of the two constrains the recommendation.
- The Relationship Disclosure Information document sets out the firm, the services, the charges, the conflicts and the complaint process.
- Complaints must be logged, escalated, and answered within the firm's stated timeline, with OBSI available afterwards.
Worked example
A 62-year-old client states a high risk tolerance and wants an all-equity portfolio. On discovery you learn she will retire in three years, needs $45,000 per year from the portfolio, and has no pension. Her risk tolerance is high but her risk capacity is limited by the imminent and ongoing draw. A suitable recommendation caps equity exposure and holds a liquidity reserve; the file must record the reasoning and the discussion with the client. Documenting why the recommendation differs from the stated preference is exactly what examiners reward.
Traps
- Treating a stated risk tolerance as sufficient when capacity is lower.
- Skipping a new suitability review after a material change such as job loss or inheritance.
- Confusing the Relationship Disclosure Information document with the Fund Facts.
- Recommending a leveraged or illiquid product to a client with short-term liquidity needs.
Key points
- KYC includes financial circumstances, knowledge, risk tolerance, objectives, time horizon and unique circumstances.
Professional Conduct, Ethics, and Compliance
What this domain tests
Standards of conduct that apply regardless of profitability: honesty, confidentiality, priority of client interest, management of conflicts, and adherence to market-integrity and anti-money-laundering rules.
Core rules
- Standard of care: registered firms and representatives must act fairly, honestly and in good faith with clients. Under the client-focused reforms, a suitability determination must put the client's interest first, ahead of the firm's compensation. Portfolio managers owe a fiduciary duty.
- Confidentiality: client information is shared on a need-to-know basis; privacy obligations flow from PIPEDA and provincial privacy statutes.
- Personal trading: pre-clearance, restricted lists, no front-running client orders, no trading on material non-public information, and no tipping.
- Conflicts of interest: identify, disclose in writing, and avoid or control. Gifts and entertainment above the firm's threshold require approval and disclosure.
- Anti-money laundering: FINTRAC requires client identification, large cash transaction reports for amounts of $10,000 or more, suspicious transaction reports regardless of amount, and screening against sanctions lists.
- Market manipulation includes wash trades, misleading news releases and layering.
Worked example
A client mentions at lunch that her employer will announce a takeover of a competitor next week. The representative may not trade the target or the acquirer, may not pass the information to anyone else, and should escalate to compliance. Materiality is judged by whether a reasonable investor would consider the information important to a trading decision; the fact that the client volunteered it changes nothing. The correct conduct is to stop, document and report - not to research whether the deal is likely to close.
Traps
- Believing disclosure alone cures a conflict; some conflicts must be avoided.
- Assuming small gifts are automatically acceptable - firm thresholds and pre-approval govern.
- Treating a suspicious transaction report as something to discuss with the client; tipping off is prohibited.
- Believing ethics questions reward the most profitable answer rather than the most defensible one.
Key points
- Representatives must act fairly, honestly and in good faith, with suitability judged in the client's interest.