IIROC urges firms to review retail client account agreements

Maria Nikolova

The Canadian industry body has found firms waiving or arbitrarily limiting their liability in the amount owed to clients for damages.

The Investment Industry Regulatory Organization of Canada (IIROC) today posted Guidance advising firms to review their retail client account agreements and to change clauses that absolve them of liability, or that are inconsistent with regulatory obligations.

During reviews of agreements from a number of firms, the Organization identified clauses that raise regulatory concerns by excluding a firm’s liability for losses. This is inconsistent with IIROC rules and firms’ regulatory obligations.

The list of such inappropriate clauses includes, for example:

  • firms waiving responsibility when clients suffer losses because of employee recommendations – effectively excluding themselves from meeting IIROC’s suitability requirements;
  • firms waiving or arbitrarily limiting their liability in the amount owed to clients for damages; and
  • firms limiting liability for technology malfunctions within their control (such as platform functionality) or unreasonably limiting liability for malfunctioning automated or outsourced processes.

IIROC has found that several Dealers have clauses that limit liability for technology systems malfunction. Where the event is within the Dealer’s control, such as functionality of the online platform or services provided by the Dealer, IIROC considers it inappropriate for the Dealer to unilaterally limit its liability.

If a Dealer has automated, or outsourced, certain tasks that relate to its regulatory obligations, the Dealer cannot disclaim liability simply on the basis that the process was automated or outsourced, IIROC stresses. In meeting their regulatory obligations to clients through automated or outsourced systems, Dealers remain responsible for performing system testing and monitoring and conducting due diligence reviews of vendors to which critical functions have been outsourced.

In addition, many of the limitation of liability clauses IIROC reviewed contained the term “gross negligence” to describe what Dealers are responsible for. IIROC notes that the term “gross negligence” is not precisely defined in Canadian jurisprudence and may be unclear to clients. Further, IIROC’s Consolidated Rules specifically refers to “negligence” (as opposed to “gross negligence”) when setting out the conduct which results in a breach of regulatory standards in subsection 1402(1) of our Consolidated Rules. Dealers are advised to consider whether their use of the “gross negligence” term complies with the standards of conduct requirements in IIROC’s Consolidated Rules.

Effective immediately, firms are urged to review and revise inappropriate limitation of liability clauses in retail client agreements, and to notify clients of changes. In upcoming examinations, IIROC will review agreements and flag any issues. Depending on the severity of non-compliance, IIROC will recommend corrections, include such clauses as a finding or, in most serious cases, refer the matter for investigation and possible disciplinary action.

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