Know-Your-Client (KYC) & suitability

A suitability determination is the judgement that a specific investment action fits this client at this moment, made against documented information. Under the suitability provisions of National Instrument 31-103, a registrant must take reasonable steps to determine that a purchase, sale or recommendation is suitable for the client.

The factors the determination rests on are consistent, and worth listing because the exam asks you to pick them out of a scenario:

1. The KYC information: objectives, horizon, risk profile, circumstances.
2. The product assessment: structure, features, costs, risks.
3. The impact on the client's portfolio, not only on the trade in isolation.
4. The costs of the action, including what the client gives up.
5. The alternatives, where a cheaper or better fitting option exists.

Three consequences follow, and each one is a question type.

Every recommendation has to tie back to the documented KYC. If the recommendation cannot be explained by the record, either the record is wrong or the recommendation is. Both are problems.

Portfolio level suitability is still suitability. A series of individually defensible trades can build a portfolio that is far riskier or more concentrated than the client's profile allows. The answer is to look at the whole picture, not to check each trade against a box and move on.

Excessive switching is a breach. Churning means trading to generate commissions rather than to serve the client. It is not defined by a number of trades. It is defined by whether the activity had a purpose for the client. A client with a long horizon and a buy and hold objective who suddenly trades monthly is a question the file has to answer.

Chapter 7 puts this determination to work, with the tax and behavioural material that shapes a full recommendation.

There is also a narrow path where suitability does not apply: a permitted client may instruct the firm in writing to stop making suitability determinations for their account, provided the account is not managed. Without that written instruction and the permitted client status, the duty stands. A candidate who treats a sophisticated client as automatically exempt has skipped both conditions.