Compliance Memo

Compliance Memorandum 2011-03; Referral Arrangements

For more information, contact:

Compliance Team
compliance@gpwealth.ca

Date Issued:

April 26, 2011

We would like to remind all financial advisors of some of the issues surrounding referral arrangements.

MFDA rule 2.4.2 and NI 31-103 part 13.7-13.11 contain rules and guidance regarding permitted referral arrangements. In addition, please refer to “GPWM Registration, Education and Remuneration Policies and Procedures; section 5.4 Referral Arrangements” for further details and guidance

Paid Referrals

Referral arrangement rules apply any time a financial advisor enters an arrangement where the financial advisor pays or receives any form of compensation, direct or indirect, for the referral of a client to or from another person or company.

Where compensation is, will, or may be involved, and prior to any referrals, several conditions must be met:

  • GPWM must be made aware of the referral arrangement,
  • GPWM must verify the qualifications of the person or company receiving the referral;
  • GPWM must approve of the arrangement; and
  • GPWM, the advisor, and the referring or receiving party must enter into a formal referral arrangement;
  • GPWM must record any compensation for the referral on our books; (meaning no direct payments to or from advisors)

Once a referral arrangement has been approved, but prior to providing services or opening an account based on a referral; we must disclose in writing:

  • Any potential conflicts of interest;
  • The names of all parties to the referral;
  • The purpose of the referral;
  • The nature of the services to be provided by each party;
  • The method of calculating the fee and, to the extent possible, the exact amount of the fee;
  • The category of registration of each participant in the referral, including a description of permitted activities and, depending on the nature of the referral, activities that are not permitted (such as advising on the sale of products not permitted to be sold by GPWM);
  • When the referral is to another registrant, a statement that all activity requiring registration resulting from the referral arrangement will be provided by the registrant receiving the referral; and
  • Any other information the client may deem important in evaluating the arrangement.

In light of the above, all financial advisors should be aware that GPWM is unable to approve arrangements where financial advisors are paid directly for a referral with certain banking products and services. Common examples identified are arrangements made directly with approved banking vendors for lending, credit or chequing services products (Manulife Bank, B2B Trust, MRS Trust, TD Bank). If you require any clarification, please contact the compliance department.

Unpaid Referrals

In some instances, clients may be referred to other professionals with no expectation of compensation. While there is no prohibition on entering into such informal relationships, per se, it is important that financial advisors be aware of the potential liabilities of such relationships and GP Wealth Management’s expectations.

Firstly, there is the risk that a review of a financial advisor’s activities may take place if a client were to complain about the actions of a person to whom the financial advisor made an unpaid referral of the client. An investigation that finds no wrong doing on the part of the financial advisor is still an investigation that will take away from productive activities for some period of time.

Secondly, even without implication of regulatory wrong doing, a civil claim, where a financial advisor is named, may find some amount of vicarious liability for having vouched for an individual to whom client harm is attributed. In addition, such civil claims may be required to be reported to the MFDA under policy 6 part 4.1 (e) requirements.

Thirdly, where there is a “non-arms-length” relationship between the two parties, regardless of the facts related to the payment of fees, a presumption that some form of compensation is exchanged would be inherent in any regulatory review or civil claim.

GP Wealth Management would expect that any unpaid, non-arms-length, referral arrangement be disclosed to GPWM supervisor staff and that a review of such arrangements on a case by case basis under any unique circumstances must be completed prior to approval.

As always, if you have any questions or comments, contact the Compliance Department by email at compliance@gpwealth.ca.