While we might worry about the stock market, we take for granted that when we work with a financial institution or advisor, our money is safe and secure.
But just how safe is our money? What protections are in place for Canadians in the event a wealth management firm, ETF or fund provider, or even a bank goes bankrupt?
If Your Dealer Fails
Generally, when you work with an independent wealth management firm, your investments are held by a third-party custodian.
There are some cases where banks or registered firms can act as custodian for their own clients, however significant walls are put up to separate their custodial business from the rest of their operations.
In both cases, the custodian holds the assets in trust for you, and your assets do not form part of their operations.
That means if your wealth management firm fails, your assets, being held by a custodian, would not form part of any bankruptcy proceedings or creditor claims on that wealth management firm.
If The Fund Company Fails
Likewise, when you buy shares or units of an Exchange Traded Fund or Mutual Fund, the holdings of the fund are held in custody by a third-party. So again, if the fund company fails, you still own the underlying stocks and bonds of the fund, and the value of these assets can be returned to you.
You would be given advanced notice that the company was closing its doors and given the choice of selling the units on the open market or having them liquidated for you. The fund price shouldn’t be affected, since the price reflects the assets it holds, not the value of the ETF company itself.
If The Custodian Fails
So, you’re safe if the wealth management firm and the fund company go belly up. In both cases, custodians are holding your investments in trust for you.
So what if the custodian fails?
In most cases, custodians act simply only as record-keepers. The custodial business of these firms is separate from any other business lines they may have. If the custodian becomes insolvent, the trustees should be able to claim the securities held on their behalf, and thus your assets wouldn’t be involved in the company’s liquidation.
In this case, as in the two cases above, a more likely scenario is another company would step in and buy the failing firm. In such a case your assets would be transferred to the new company.
The bigger issue in these examples is liquidity. There may be lengthy court proceedings that prevent you from accessing your money in a timely manner.
If Your Bank Fails
Some of Canada’s larger banks have been around for over 150 years. Collectively known as the ‘Big 6’, they dominate the Canadian financial landscape and employ hundreds of thousands of Canadians.
While the probability of one of them collapsing is low, it’s not impossible.
The Bank of Canada, Canada’s central bank, recently released a report that simulated a large recession and its impacts.
The goal was to assess whether the Canadian banking system could withstand a severe and prolonged recession, without significant government support.
The scenario included a 30% drawdown in real estate values, and GDP and unemployment rates far worse than we saw in the past three recessions.
They are resilient. While they would incur large losses, at no point would any of them be under threat of breaching capital requirements. They would remain solvent with no risk of collapse.
If a bank did fail, new legislation passed in 2018 would limit the consequences. Under the new bail-in regime, rather than leaving taxpayers with the bill like we saw in the US Great Financial Crisis, it’s the stock and bondholders that would suffer.
It allows the Canadian Deposit Insurance Corporation (CDIC) to take control of the failing bank and convert long-term bonds, which are a liability to the bank, into equity. By eliminating the banks liabilities, it allows the bank to maintain the safety of its deposits.
It should be noted that although regular bank products, like chequing, savings accounts and GICs, are liabilities for the bank, they are specifically excluded from being converted into equity. Only the long-term bonds are affected.
It’s also worth noting that a Big 6 bank failing is among the worst possible financial catastrophes the country could face, and it’s highly unlikely the government would stand idly by in such an event. There are other powers at their disposal to resolve a failing bank, and they would certainly use them.
In addition to all of this, Canada has several protections that provide insurance against consumer losses.
The Canadian Investor Protection Fund backstops all IIROC regulated dealers. Membership in the CIPF is compulsory for all IIROC-regulated firms.
Their role is to provide limited coverage in the event thatif your dealer fails, and your assets are not returned to you. Coverage is limited to $1,000,000 per account type, per person:
- $1M for aggregate TFSAs, holding companies, and non-registered accounts
- $1M in aggregate for registered accounts like RRSPs, LIRAs, RRIFs,
- $1M for RESPs where you are the subscriber
- $1M for other business accounts
For example, let’s say you own two ETFs in your RRSP. We’ll call them ONE and TWO. Assume each ETF has a current market value of $1M.
If your wealth management firm went bankrupt, the custodian’s job is to return your assets to you. If for some reason they were able to return all your shares of ONE, but none of your shares of TWO, the CIPF would step in and provide you with the missing $1M.
Note the value you would receive is based on the value of the ETF shares at the date of insolvency.
While the CIPF has had to step in numerous times in its history, it prides itself on a 100% success rate historically in recovering investor funds up to the prescribed limits.
There are other forms of protection as well:
- The Canada Deposit Insurance Corporation insures bank deposits up to $100,000 per account type, per institution
- Credit unions have their own separate coverage. In BC, Alberta, Saskatchewan, and Manitoba, 100% of your deposits are insured.
- Other provinces vary from $100,000 to $250,000
- Ontario insures non-registered accounts up to $250,000, and registered accounts have unlimited protection
- Every life insurance company authorized to sell insurance in Canada is required, by the federal, provincial, and territorial regulators, to become a member of Assuris. Assuris covers up to 85% of your life insurance benefits in the event your insurance company fails. https://assuris.ca/how-am-i-protected/list-of-assuris-members/
So how safe is your money? About as safe as it gets. We’re fortunate to have one of the most stable and secure financial industries on the planet.
While no system is perfect and there is room for improvement, I’ve got better things to worry about.
Mark McGrath, CFP®, CIM®, CLU®
Sweeney Bride Strategic Wealth Advisory
Wellington-Altus Private Wealth Inc.