Documentation key to meeting compliance standards, says expert

(November 5, 2004) Form is just as important as substance when it comes to meeting compliance standards, says Richard Austin, deputy head of compliance at Scotiabank Wealth Management. The ability to show that you’re doing the right thing is just as important as doing the right thing, says Austin, who presented a seminar on compliance earlier this week at the Peel Institute’s fall symposium in Toronto.

To illustrate, Austin cites the example of informal trusts, or in-trust accounts. Parents of minor children will often set up an in-trust account for their children (usually as a potential tax-savings device for educational purposes), to be claimed when the child reaches the age of majority. The fact these agreements are informal means there is no legally binding document that could potentially hold up in court.

Say, the Hill parents set up an in-trust account for their son, Ted, to provide funding for his future university education. Their advisor neglects to articulate to the Hills that the trust is informal. When Ted turns 18, he decides to claim the money to purchase a Harley-Davidson motorcycle. Should the Hills decide to contest their child’s new-found purchasing power, they’ll have no legal recourse. Their advisor, however, still runs the risk of being deemed incompetent.

“It’s a reputational risk that you can’t control if that child goes out and does something entirely foolish, causing pain to themselves or to someone else,” Austin explained in an interview, adding that whether or not the advisor properly informs his or her clients of the in-trust account’s provisions, without the documentation to support it, there could be grounds for future legal action.

Austin suggests that advisors, in addition to being meticulous in their paperwork and documentation when setting up in-trust accounts for clients, need to “become educated about the advice they’re giving to their clients when they’re making this recommendation … to explain the situation to the parents and make sure the parents know [about] the absence of some sort of documentation.”

“Even if there has been no breach or loss or damage, you have to show to the regulators, in addition to having policies and procedures, you’re in fact following them, and be able to demonstrate that, more than saying it you’re doing it,” Austin says. “It’s not enough to have a policy manual on the shelf — you’ve got to do something with it.”

Heidi Staseson is Assistant Editor at Advisor’s Edge magazine

(11/05/04)