Financial & Operations Compliance

One of the main roles of IIROC’s Financial and Operations Compliance department (FinOps) is to assess whether firms have enough capital for the type and scope of their business activities. FinOps monitors firms for compliance with IIROC financial rules to reduce the possibility of financial failure due to excessive leverage or risky business practices.

FinOps Information

FinOps monitors the financial status of IIROC-regulated firms and enforces compliance with IIROC rules. The main elements of the department’s work are:

  • Review of financial regulatory filings – FinOps staff review monthly financial reports and year-end audited joint regulatory financial questionnaires and reports to identify changes in trends, financial status and profitability. When necessary, IIROC can take preventive measures to preserve the capital position of a firm and protect client money and securities. Any investment dealer that does not meet minimum capital requirements is referred to as capital-deficient. The firm must immediately rectify its capital position or face possible suspension or termination of membership.

  • Annual and biennial "surprise" field examinations – FinOps staff conduct "surprise" examinations of each investment dealer’s books and records to ensure the reliability of their unaudited regulatory filings.

  • Review of audit working papers – Each IIROC-regulated firm is subject to a year-end audit by an approved panel auditor to validate the information filed by the firm with IIROC. To ensure the quality of the audit, FinOps staff review the panel auditor’s working paper files within three months of the filing date of the firm’s joint regulatory financial questionnaire and report.

IIROC rules require firms to protect client assets by keeping them separate, or segregated, from their own assets. This minimizes the risk of client assets being lost if the firm suffers failure or insolvency.

If problems arise and a regulated firm becomes capital deficient, IIROC immediately intervenes. IIROC allows the firm 24 to 48 hours to remedy the situation generally by injecting new capital into the firm or facing immediate suspension if it is determined there is a risk of an imminent financial loss to the investing public. Membership suspensions are promptly communicated to the public, and all capital deficiencies are reported to Enforcement for possible disciplinary action.



Early Warning System

The Early Warning (EW) system measures the capital, profitability and liquidity position of IIROC-regulated firms to monitor their financial health.

Data from a firm’s monthly and yearly reports are used to calculate its Risk Adjusted Capital (RAC). The EW system measures a dealer’s RAC against certain arithmetical benchmark tests designed to detect the risk of insolvency. For example, staff determine the ratio of capital erosion, measured in months, by looking at the trend in reported operating losses relative to the remaining available capital of a firm.

If an IIROC-regulated firm fails any of the EW tests, or if IIROC determines its condition is unsatisfactory, the firm may be designated Early Warning Level 1 or Level 2, depending on the degree of risk. Rule 30 imposes standard restrictions on Dealer Members designated at each level.

To place a firm in Early Warning does not indicate that the public is currently at risk. The restrictions allow IIROC to require the firm to pause and re-assess its business model, implement changes such as cost rationalization measures or recapitalize. IIROC will closely monitor the firm's ongoing financial results and determine whether the measures have a positive effect or there is need for additional regulatory intervention to prevent the firm from incurring a capital deficiency.

In the event that a firm actually becomes capital deficient, meaning its RAC drops below an acceptable level, it is given no more than 24-48 hours to remedy its RAC or face immediate suspension if there is any likelihood of financial loss to the public.

Membership suspension notices are public information. Material breaches in capital requirements are referred to Enforcement for possible disciplinary action. All clients of IIROC-regulated firms are covered by the Canadian Investor Protection Fund (CIPF), which protects clients in the event that a Dealer Member firm becomes insolvent.



Risk Assessment Model (FinOps)

The Financial & Operations Compliance Risk Assessment Model is a risk management tool to help identify, define, assess and weigh risks in respect to IIROC Dealer Member firms and determine priority focus in IIROC’s examination cycle of Dealer Member firms.

Essentially, the model gives an indication of the comparable risk assessed for each IIROC-regulated firm relative to its peers and all other firms under IIROC’s jurisdiction.

The objective of the FinOps Risk Assessment Model is to identify regulated firms having a higher than average probability of incurring a capital deficiency. With this information, IIROC ensures that regulatory focus is placed on higher-risk firms.

The model identifies two risk types, six risk categories and twenty specific risks. Each specific risk is assessed and weighted to determine an individual firm business risk score.

The model then calculates the risk control score by identifying two risk control categories and eight specific risk controls. Each specific risk control is assessed and weighted. Risk control is the method the firm uses to mitigate or reduce its business risk. The higher the risk control score the higher the quality of overall risk control.

The resulting risk control score is discounted and 40% of the score is subtracted from the business risk score to achieve a residual risk score for each firm. The discount factor is applied consistently to all Dealer Member firm risk control scores to better differentiate residual risk scores.

To assess financial and compliance risk, IIROC staff weigh various kinds of risk alongside the controls that firms use to manage that risk. In summary, the formula for the FinOps risk assessment model is as follows:

Residual Risk Score = Business Risk Score - [40% of Risk Control Score]

  1. Business Risk Weightings: Each risk type is assigned a fixed weighting to differentiate the level of its importance in the model; Inherent Risks have an aggregate weigthing of 76% and Internal Factors have an aggregate weighting of 24%.

  2. Residual Risk Rating: IIROC can assess a firm’s financial operations and compliance residual risk as low, moderate-low, moderate-high or high, compared to other dealer firms.

Several factors are considered in an assessment of a dealer’s financial operations and compliance risk.

View a diagram of the assessment structure.

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