Do you know what would happen to the money you have invested with an investment advisor or in your savings account at the bank if the institution were to go under? Chances are this isn’t going to happen, but you just never know. Large banks and investment firms have gone insolvent in the past and will in the future. The good news is there are forms of coverage out there to protect you and your money in the unlikely event that this does happen.
Today we’re going to look at what protection is available to you across five different sectors of the financial industry.
The first level of protection in Canada will be the one that likely applies to almost all of you out there, because it covers the banks. I’m sure there are some people out there who hide all their money under their mattresses and have never opened a bank account, but I can’t imagine they are the same people who are here reading a personal finance blog. Almost all of us have at least some amount of money sitting at the bank, whether it be in a chequeing of savings account or invested in a term deposit. CDIC only covers basic bank stuff and does not include investments like stocks or mutual funds (we’ll get to that next).
You’re likely wondering how much coverage you have…
It’s not quite that simple, but that’s for the best. CDIC covers 100% of your eligible deposits up to a maximum of $100,000 per depositor per insured category. Ok, so what the heck does that mean? Well, the depositor is you, but you can get multiple $100,000 limits depending on what types of accounts you hold. If you have a chequing and savings account (or any other non-registered account) those all fit into one category, but if you also have registered accounts then you get additional coverage. You also get additional coverage if you have a joint account with someone else. Let’s say you have an individual chequing account and savings account (that’s $100,000), a joint chequing account (another $100,000), an RRSP account (another $100,000) and a TFSA account (another $100,000). This would give you a total of $400,000 of coverage through CDIC.
-savings accounts, chequing accounts, term deposits of five years or less, money orders, certified cheques and bank drafts are all covered by CDIC as long as they are with a member institution
-mutual funds, stocks, bonds, term deposits over five years, and foreign currency are not covered by CDIC
-you get $100,000 of coverage per depositor (that’s you) and per insured category
Credit unions have become more and more popular across the country but they don’t always follow the same policies as the national banks. Federal credit unions are covered under CDIC but those that are provincially run are not. That doesn’t mean they don’t have any coverage though. Here in Alberta we have the Credit Union Deposit Guarantee Corporation that does basically the same thing as CDIC but only for member firms in this province. Their coverage is actually a bit more extensive and doesn’t have the $100,000 limit. If you live in a different province and bank with a provincial credit union you should be able to to find the information about any guarantees on their website.
Now we are moving on to the coverage available for your investments. There are two different regulating bodies for investment advisors in Canada. The difference between the two is in what products those specific advisors are allowed to sell. Advisors licensed under the Investment Industry Regulatory Organization of Canada (IIROC) are able to sell a variety of investment options including stocks, bonds, mutual funds, ETF’s, etc. Whereas advisors licensed under the Mutual Fund Dealers Association are only allowed to sell mutual funds. Each division has their own protection plan in place for clients.
The CIPF insures the holdings of clients of IIROC member firms if they go under. Similar to CDIC insurance, CIPF provides coverage based on the type of account you hold but at a higher amount.
-$1 million for all non-registered accounts/trading accounts (including TFSAs)
-an additional $1 million for all registered retirement accounts (RRSPs, LIRAs, Spousal RRSPs, RRIFs, etc)
-an additional $1 million for all registered education plans (RESPs)
These limits are all on an individual level, so if you also have a joint non-registered account that would count separately. The only time you would run into a problem is if you have more than $1 million dollars in any one category. For most people this isn’t going to be an issue, but if you are in that situation you can consider splitting your funds between two (or more) different institutions to consider every dollar is covered.
One thing to note is that the coverage only applies to the market value of your investments on the date the institution becomes insolvent. As we all know, investments can go up and down and this insurance is not in place to cover losses due to market conditions. If you invested $100,000 on July 1st and it decreased to $50,000 when your firm became insolvent on November 1st, you would only be eligible for coverage for the $50,000.
The coverage provided by MFDA is almost exactly the same as that provided by CIPF. The coverage limit is also $1 million and the account categories are the same. It also doesn’t cover changes due to the markets.
The final financial sector that provides protection to its clients is insurance. If you have a insurance policy with a member firm that fails, Assuris will transfer your policy to another member firm and guarantee 85% of the promised benefit. If you have a policy that has an investment component (like universal life insurance or annuities), you will be guaranteed 100% coverage up to $100,000. Life insurance is most common product that would be covered by Assuris, but it also extends to critical illness insurance, long term care insurance, segregated funds, annuities, health expense coverage, and disability insurance.
You’ll notice that I talk about ‘member firms’ for all of the above sectors. Not every single Canadian financial institution is included in this and you will want to ensure that any business you are dealing with is a member of the applicable group. You should be able to easily find this information on their website, posted in their offices, or marked on their paperwork. Each of the coverage groups has a ‘member firm’ search function on their websites so you can easily visit those and confirm. There is zero reason to invest your money with a firm that isn’t insured by one of these plans. The majority of places will be and it’s just not worth the risk if they aren’t.