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Canadian Investor Protection Fund

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Canadian Investor Protection Fund

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Topics

Update 2009FailuresRe-alignmentAssessmentCommunication Strategy

Enterprise Risk ManagementPurpose of Risk Management

FunctionRisk Management FrameworkRisk Categories and Mitigation

Compensation Funds

Update 2009FailuresRe-alignmentAssessmentCommunication Strategy

Enterprise Risk ManagementPurpose of Risk Management

FunctionRisk Management FrameworkRisk Categories and Mitigation

Compensation Funds

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Update 2009

Failures 5 Members suspended by Investment

Industry Regulatory Organization of Canada (“IIROC”) but no insolvencies

2 Ponzi style frauds – not CIPF MembersEarl Jones – 150 investors lost

CAD$75 – CAD$100 millionGary Sorenson – 3,000 investors

lost CAD$100 – CAD$400 million

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Update 2009 (cont’d)

Re-alignment MOU with CSA and new Industry

Agreement with IIROC (self-regulatory organization) became effective September 29, 2008

Major Changes

Eliminated CIPF oversight of IIROC

Replaced CIPF’s veto over policy changes that affect the Fund with moral suasion to IIROC Board or, if necessary, increased assessments for added risk

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Update 2009 (cont’d)

Re-alignment (cont’d) Regulatory financial filing continues

to be addressed to CIPF and IIROC

CIPF no longer does field exams but continues to receive and analyze the data from Members and Auditors for risk management purposes

CIPF seconds staff to IIROC to maintain industry knowledge and readiness to work on insolvencies

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Update 2009 (cont’d)

Assessment Q3 2009 will be the first quarter of

the full differential assessment method

Members will no longer be able to pay on the lesser of revenue and differential assessment

CIPF to collect $2 million per quarter in fiscal 2009/2010 versus $2.5 million per quarter in 2008/2009

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Update 2009 (cont’d)

Free Credits versus Client Net Equity

Client net equity continues to increase with the recovery of the markets in 2009, however, client free credits have leveled off at $35 billion.

Client Net Equity Components

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200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1,600,000,000

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4

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31-M

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31-M

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7

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Sec

uri

ties

($0

00's

)

-

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

Fre

e C

red

its

($00

0's)

Sum of Securities Total Client Net Equity Sum of Free Credits

Free Credits

Securities

Total

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Update 2009 (cont’d)

Profit and Loss

July 2009 year-to-date revenue has decreased by 1.4%, however profit improved by 9.2%, compared to the same period in 2008. Revenue and profit for the three months ended July 2009 are above trend.

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200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

('0

00

's)

Revenue Profit and Loss

12 per. Mov. Avg. (Revenue) 12 per. Mov. Avg. (Profit and Loss)

Revenue

Profit and Loss

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Update 2009 (cont’d)

Regulatory Capital

Regulatory capital available for use continues to increase, however much of the new capital remains unemployed resulting in a capital cushion of $10.5 billion.

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Communications

As the result of research conducted in 2008, we developed the following objectives:

Increase advisor awareness and understanding of CIPF’s mandate, coverage, eligibility and the IA’s role as chief communicator with investors

Better inform individuals preparing for a career in the investment industry about CIPF at point of entry

Increase awareness and understanding of CIPF’s mandate and the coverage with the media

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Communications (cont’d)

The elements of the plan to implement these objectives included:

Creation of continuing education module for IAs completed in 2008

Informing IAs via a tri-annual electronic newsletter “Worth Knowing”, two have been issued in 2009

Updating our website – launch in fall 2009

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Communications (cont’d)

Contemporizing our logo and refreshing the information about CIPF – to be applied to the CIPF brochure, Member decal and website in 2009/2010

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Enterprise Risk Management

Purpose of Risk Management Function

CIPF’s risk management function is designed to: Identify exposures that could impair

CIPF’s ability to carry out its mission Assess the probability / impact of

those exposures Mitigate the risk introduced by those

exposures by ensuring procedures and controls are in place to minimize the impact of the exposures

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Risk Management Framework

CIPF’s Mission is:

To contribute to the security and confidence of customers of Canadian investment dealers by maintaining adequate resources to return assets to customers in cases where a Member becomes insolvent.

Enterprise Risk Management (cont’d)

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Risk Management Framework (cont’d)

As such, an exposure is any event that impairs CIPF’s ability to return customer assets on a timely basis in the event of an insolvency and/or causes customers of Members to lose confidence in CIPF’s ability to return their assets.

Enterprise Risk Management (cont’d)

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Risk Management Framework (cont’d)

Examples of exposures include failure to:maintain an adequately sized fund either through calculation of fund size or controlling the cost of insolvency maintain the correct infrastructure, including retaining qualified staff honour valid claims on a timely basiscommunicate coverage correctlymaintain up-to-date coverage policies

Enterprise Risk Management (cont’d)

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Risk Categories

CIPF has identified the following four major risk categories that could prevent CIPF from carrying out its mission:

1.Member Default Risk

2.Financial Risk

3.Operational Risk

4.Reputational Risk

Enterprise Risk Management (cont’d)

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1. Risk Categories – Member Default

CIPF’s risk of loss, including costs incurred for administration, in the event of a Member’s insolvency.

 

Enterprise Risk Management (cont’d)

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1a)Member RiskThe risk that CIPF does not have the

powers to control the quantum of risk it is exposed to.MitigationFund Size FormulaParticipation in policy formationCoverage Policy with specified limits

1a)Member RiskThe risk that CIPF does not have the

powers to control the quantum of risk it is exposed to.MitigationFund Size FormulaParticipation in policy formationCoverage Policy with specified limits

Enterprise Risk Management (cont’d)

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1b) Problem Member Identification

The risk that CIPF does not promptly identify Member firms that pose an unacceptable level of risk to the Fund.

Mitigation

Industry Agreement:

Reliance on IIROC examinations

Information sharing policy with IIROC

Track public information

Insolvency Manual including decision tree

1b) Problem Member Identification

The risk that CIPF does not promptly identify Member firms that pose an unacceptable level of risk to the Fund.

Mitigation

Industry Agreement:

Reliance on IIROC examinations

Information sharing policy with IIROC

Track public information

Insolvency Manual including decision tree

Enterprise Risk Management (cont’d)

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1c) Intervention

The risk that CIPF cannot or does not take effective action with respect to a problem Member.

Mitigation

Ability to petition into bankruptcy

Industry Agreement

MOU with CSA includes obligation to report

Insolvency Manual including decision tree

1c) Intervention

The risk that CIPF cannot or does not take effective action with respect to a problem Member.

Mitigation

Ability to petition into bankruptcy

Industry Agreement

MOU with CSA includes obligation to report

Insolvency Manual including decision tree

Enterprise Risk Management (cont’d)

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2. Risk Categories – Financial

The risk associated with managing CIPF’s investment portfolio.

2. Risk Categories – Financial

The risk associated with managing CIPF’s investment portfolio.

Enterprise Risk Management (cont’d)

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2a) Availability of Funds to Meet Customer Obligations

The risk that the funds in the portfolio will not be available to CIPF to honor its obligations due to:

Inability to liquidate the portfolio Failure of third party issuer to meet

obligation, including the line of credit providers and re-insurance provider

Failure of custodian to return assets Adverse change in the market value of

the CIPF investment portfolio

2a) Availability of Funds to Meet Customer Obligations

The risk that the funds in the portfolio will not be available to CIPF to honor its obligations due to:

Inability to liquidate the portfolio Failure of third party issuer to meet

obligation, including the line of credit providers and re-insurance provider

Failure of custodian to return assets Adverse change in the market value of

the CIPF investment portfolio

Enterprise Risk Management (cont’d)

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2b)Availability of Funds to Meet Customer Obligations (cont’d)

Mitigation Investment Policy, government

bond ladder Custodial Agreement with third

party Insurance Policy issuer is A rated Line of Credit issuers are Schedule 1

Banks

2b)Availability of Funds to Meet Customer Obligations (cont’d)

Mitigation Investment Policy, government

bond ladder Custodial Agreement with third

party Insurance Policy issuer is A rated Line of Credit issuers are Schedule 1

Banks

Enterprise Risk Management (cont’d)

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3. Risk Categories – Operational

CIPF’s risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.

3. Risk Categories – Operational

CIPF’s risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events.

Enterprise Risk Management (cont’d)

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3a) People

The risk that CIPF is unable to hire and retain a sufficient number of qualified staff for the work required and ensure that those staff maintain their professional competency.

Mitigation

Ongoing training Employee Handbook of Policies and

Procedures Compensation and Benefits Policies Succession planning

3a) People

The risk that CIPF is unable to hire and retain a sufficient number of qualified staff for the work required and ensure that those staff maintain their professional competency.

Mitigation

Ongoing training Employee Handbook of Policies and

Procedures Compensation and Benefits Policies Succession planning

Enterprise Risk Management (cont’d)

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3b)Information

The risk that CIPF does not maintain timely, accurate and relevant financial information to facilitate informed decisions.

Mitigation

Financial Procedures Control Manual

Assessment Model

3b)Information

The risk that CIPF does not maintain timely, accurate and relevant financial information to facilitate informed decisions.

Mitigation

Financial Procedures Control Manual

Assessment Model

Enterprise Risk Management (cont’d)

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3c) Technology

The risk that CIPF’s technology hinders staff’s ability to efficiently and effectively carry out their primary responsibilities.

Mitigation

CIPF Network Administration Binder of detailed procedures

3c) Technology

The risk that CIPF’s technology hinders staff’s ability to efficiently and effectively carry out their primary responsibilities.

Mitigation

CIPF Network Administration Binder of detailed procedures

Enterprise Risk Management (cont’d)

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3d)Process

The risk that CIPF fails to develop effective internal controls to safeguard its assets and ensure such controls are operating effectively.

Mitigation

Financial Procedures Control Manual

3d)Process

The risk that CIPF fails to develop effective internal controls to safeguard its assets and ensure such controls are operating effectively.

Mitigation

Financial Procedures Control Manual

Enterprise Risk Management (cont’d)

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3e) Legal / Compliance

The risk that CIPF fails to identify and comply with its legal and other obligations and requirements.

Mitigation

Requested statutory immunity

Legal counsel budget

Compliance with bylaws and constating documents

Register of contracts

3e) Legal / Compliance

The risk that CIPF fails to identify and comply with its legal and other obligations and requirements.

Mitigation

Requested statutory immunity

Legal counsel budget

Compliance with bylaws and constating documents

Register of contracts

Enterprise Risk Management (cont’d)

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3f) Business Continuity

The risk that a disruption impacting CIPF’s personnel, information, premises, technology or operations will impede its ability to carry out its mandate.

Mitigation

Certified and Tested Business Continuity Plan

Test annually by having management team work remotely for 1 day and perform specified tasks

3f) Business Continuity

The risk that a disruption impacting CIPF’s personnel, information, premises, technology or operations will impede its ability to carry out its mandate.

Mitigation

Certified and Tested Business Continuity Plan

Test annually by having management team work remotely for 1 day and perform specified tasks

Enterprise Risk Management (cont’d)

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3g)SecurityThe risk that CIPF fails to maintain the

safety of the resources required to carry out its mandate, including human resources, physical assets and information.

3g)SecurityThe risk that CIPF fails to maintain the

safety of the resources required to carry out its mandate, including human resources, physical assets and information.

Enterprise Risk Management (cont’d)

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3g)Security (cont’d)Mitigation Privacy Policy Insurance Policies Human Resources Policies Employee Handbook of Policies and

Procedures Office in Class A building Business Continuity Plan

3g)Security (cont’d)Mitigation Privacy Policy Insurance Policies Human Resources Policies Employee Handbook of Policies and

Procedures Office in Class A building Business Continuity Plan

Enterprise Risk Management (cont’d)

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4. Risk Categories – Reputational

The risk of an event that significantly affects stakeholders’ perceived trust and confidence in CIPF.

4. Risk Categories – Reputational

The risk of an event that significantly affects stakeholders’ perceived trust and confidence in CIPF.

Enterprise Risk Management (cont’d)

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4a)Claims Handling

The risk that CIPF does not respond to legitimate claims as set out in its coverage policy.

Mitigation

Claims Procedures

4a)Claims Handling

The risk that CIPF does not respond to legitimate claims as set out in its coverage policy.

Mitigation

Claims Procedures

Enterprise Risk Management (cont’d)

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4b)Coverage Policies Not Up to Date

The risk that the coverage policies do not address current market conditions.

Mitigation

Participation on Industry Committees

Claims Hearings by CIPF Board Members

Bankruptcy Act Authorities of Trustee

4b)Coverage Policies Not Up to Date

The risk that the coverage policies do not address current market conditions.

Mitigation

Participation on Industry Committees

Claims Hearings by CIPF Board Members

Bankruptcy Act Authorities of Trustee

Enterprise Risk Management (cont’d)

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4c) Communication

The risk that CIPF does not correctly or effectively communicate its role and the scope of its coverage.

Mitigation

Communication – research

Customer query log

Education modules for Investment Advisors

4c) Communication

The risk that CIPF does not correctly or effectively communicate its role and the scope of its coverage.

Mitigation

Communication – research

Customer query log

Education modules for Investment Advisors

Enterprise Risk Management (cont’d)

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Compensation Funds

CIPF and its counterparts in the US and UK joined IOSCO in 2009 to ensure a regular forum for Funds to meet and exchange information

Canada will host the 2010 IOSCO Annual Conference in Montreal, Quebec. A meeting of compensation funds will be arranged for all interested parties