The Investment Industry Regulatory Organization of Canada (IIROC) published its “final guidance” on borrowing-to invest strategies Wednesday, stressing the obligations of financial advisers to adequately warn and supervise their clients regarding the use of these often risky strategies.
It’s not uncommon for Canadians to borrow money to make their annual RRSP contribution for instance and pay back the loan with the tax refund the contribution generates, this is called a “gross up” loan. RRSP “top up” and “catch up” loans however are considered more risky since they are typically larger and require investors to pay back the loan from other income sources.
IIROC-regulated firms must have sound policies, procedures and controls in place when borrowing-to-invest strategies are recommended by the firm and its registered representatives, the regulator said in a press release Wednesday. Advisers must also ensure the risks are fully explained and that clients are aware of the potential impact of borrowing-to-invest strategies based on the clients’ financial situation, risk appetite and ability to withstand loss.
In most cases, borrowing to invest (also known as leveraging) isn’t particularly well-suited for retirees or those who access their money in the near-term and therefore need to protect their initial capital investment.
In its guidance, IIROC included a checklist for advisers as well as a bulletin for consumers with points to consider before borrowing to invest, including: discussing the overall household financial situation with an adviser, understanding the loan terms, putting in place a loan repayment plan as well as understanding the tax implications.