Posted by Anjali Kaur on Jun 23, 2022

Suitability Requirement

As a dealing representative, you have a legal requirement to recommend products that are suitable for your client’s needs and objectives.

As a dealing representative, you have a regulatory obligation to ensure that every client transaction is suitable for your client. The process of assessing suitability involves matching the characteristics of the proposed investment with the investor’s stated needs as documented in the Know Your Client (KYC) information.

Example of recommendation

Your client, Tim, is 72 years old. His investment objective is to earn income, and he has $100,000 to invest over a five-year time horizon. Tim has low-risk tolerance. You have performed due diligence in researching the different products. Based on Tim’s profile and investment goals, you recommend a portfolio of fixed income products matching the five-year time horizon that will provide Tim with a regular flow of income, without resulting in depreciation of his portfolio.

The fixed income products recommended in this example match the client’s investment goals and risk tolerance as identified in the KYC information. They are therefore suitable for this client. There are no investment products that are suitable or unsuitable in general terms. Suitability is determined only when viewed against a given client’s KYC information.

Suitability Process

Compliance with the suitability rule is a three-step process.

Step 1: Know Your Client (KYC)

To fulfill the KYC requirement, you must:

  1. Establish your client’s identity.
  2. Where there may be cause for concern, establish your client’s reputation.
  3. Ensure that you have sufficient information about your client to meet your regulatory obligations
    1. When you make a recommendation to your client
    2. when you accept instructions from your client

Step 2: Know Your Product (KYP)

It is very important that you have in-depth knowledge about all products that you buy and sell for your clients, or recommend to your clients. You must be able to explain to your clients each product’s key features, risks, and any initial and ongoing costs and fees.

Step 3: Assess Suitability

To assess the suitability of a trade, you must match the characteristics of the proposed investment, determined during the KYP due diligence, with the client’s stated needs as documented in the KYC information.

Time To Test

  1. Bart is a new dealing representative. You have been asked to train and orient him. During the course, Bart wants to know the key concept pertaining to Know Your Product (KYP). Which of the following is the key concept?

Solution: It is essential that you know and understands the attributes and risks of the product.

Useful Links

DescriptionURL
MFDA Member Regulation 0069  mfda.ca/regulation/notices/MR-0069.pdf
MFDA Member Regulation 0025mfda.ca/regulation/notices/MR-0025.pdf
National Instrument NI 31-103     osc.gov.on.ca/en/13596.htm

Thank You!

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