IFC The Know Your Client Process 4 — Questions and Answers
Question 1: A client who has always been classified as 'growth' oriented suddenly asks to move entirely to GICs after a market downturn. What is the best interpretation of this behaviour for KYC purposes?
- The original KYC was incorrect and must be corrected retroactively
- The client's risk tolerance may have changed and the KYC file should be reviewed and updated (Correct answer)
- The representative should override the request because it conflicts with the prior profile
- Market-driven decisions do not require a KYC update
Correct answer: The client's risk tolerance may have changed and the KYC file should be reviewed and updated
Significant changes in client behaviour may indicate a shift in risk tolerance or objectives, and the KYC file should be reviewed and updated to reflect the client's current situation.
Question 2: Under National Instrument 31-103, what is the 'know your product' obligation and how does it relate to KYC?
- Representatives must personally invest in every product they recommend
- Representatives must understand a product's features and risks to match it to a suitable client profile (Correct answer)
- Firms must publish product knowledge tests for all registered staff quarterly
- Know your product applies only to exempt market products
Correct answer: Representatives must understand a product's features and risks to match it to a suitable client profile
Know your product requires representatives to understand each product's features, risks, and costs so they can determine if it is suitable for a specific client's KYC profile.
Question 3: A 70-year-old retired client with moderate risk tolerance asks to invest a large portion of their savings in a leveraged mutual fund. What is the most critical suitability concern?
- Leveraged funds are prohibited for clients over 65
- The client's short time horizon and need for capital preservation likely conflict with the high risk of leveraged products (Correct answer)
- Leveraged funds are only available to accredited investors
- The fund's MER is likely too high for the client's tax bracket
Correct answer: The client's short time horizon and need for capital preservation likely conflict with the high risk of leveraged products
Leveraged funds carry amplified risk and are generally unsuitable for retirees with limited time horizons who depend on capital preservation, regardless of stated moderate risk tolerance.
Question 4: What is a 'trusted contact person' (TCP) and why was this KYC requirement introduced in Canada?
- A co-signer who shares liability for the client's account losses
- A person the firm may contact if there are concerns about the client's financial exploitation or capacity (Correct answer)
- The client's designated beneficiary for registered accounts
- A compliance officer assigned to monitor high-net-worth accounts
Correct answer: A person the firm may contact if there are concerns about the client's financial exploitation or capacity
The TCP requirement was introduced to allow firms to contact a named individual if there are concerns about a client's mental capacity or potential financial exploitation.
Question 5: When assessing suitability for a mutual fund recommendation, which combination of KYC factors should a representative consider together?
- Only risk tolerance and investment objectives
- Risk tolerance, risk capacity, time horizon, investment objectives, and investment knowledge (Correct answer)
- Net worth, annual income, and employment status only
- Investment knowledge and the client's preferred fund company
Correct answer: Risk tolerance, risk capacity, time horizon, investment objectives, and investment knowledge
A complete suitability assessment requires integrating all key KYC factors — no single factor is sufficient on its own.
Question 6: A representative discovers that a client's KYC form has not been updated in four years despite several life changes. What regulatory risk does this create?
- The account must be frozen until updated
- The firm may face regulatory action for failing to maintain current client information and for unsuitable recommendations made in the interim (Correct answer)
- Only the representative faces personal liability, not the firm
- The client forfeits any right to complain about past recommendations
Correct answer: The firm may face regulatory action for failing to maintain current client information and for unsuitable recommendations made in the interim
Outdated KYC records expose the firm to regulatory sanctions and potential claims of unsuitable recommendations made without current knowledge of the client's situation.
Question 7: Which of the following scenarios would constitute a 'material change' requiring immediate KYC update rather than waiting for the next annual review?
- A client's home phone number changes
- A client divorces and loses half their liquid assets in a settlement (Correct answer)
- A client switches their primary bank account
- A client adds a second email address to their profile
Correct answer: A client divorces and loses half their liquid assets in a settlement
Divorce resulting in a substantial loss of assets materially affects the client's net worth, risk capacity, and possibly investment objectives, requiring an immediate update.
IFC The Know Your Client Process 4
A client who has always been classified as 'growth' oriented suddenly asks to move entirely to GICs after a market downturn.
What is the best interpretation of this behaviour for KYC purposes?