Bank accounts and investment accounts aren’t typically thought of as high-risk places to store money, but as we’ve seen in 2023 with the collapse of many regional banks in North America, client funds may come under scrutiny in the event of a member firm insolvency. No need to panic though… your personal finances are much more protected than you may think.
In Canada, personal finances are generally well-protected through various regulatory measures and financial institutions. Two key organizations that provide financial protection to Canadians are the Canadian Deposit Insurance Corporation (CDIC) and the Canadian Investor Protection Fund (CIPF). Let’s take a dive into these two institutions and how exactly they act as “guardians to the green”.
Canadian Deposit Insurance Corporation (CDIC)
The Canadian Deposit Insurance Corporation (CDIC) is a federal Crown corporation that provides deposit insurance to eligible deposits at member financial institutions. CDIC was created in 1967 to protect depositors in the event of a bank failure or insolvency. The CDIC covers eligible deposits up to $100,000 per depositor per member institution in case the member financial institution fails. As talked about in Lesson 87, the CDIC is essentially the Canadian equivalent of the FDIC in the US.
CDIC coverage is automatic and free for eligible deposits held at CDIC member institutions. CDIC member institutions will typically include your big banks like RBC and TD, but there are actually many smaller financial institutions that are members as well. A fulsome list can be found on the CDIC website.
The CDIC covers deposits in savings accounts, chequing accounts, term deposits, and guaranteed investment certificates (GICs). Not all deposits are eligible for CDIC coverage, and there are some restrictions on the types of accounts that qualify. For example, foreign currency deposits, investments such as stocks and mutual funds, and safety deposit boxes are not covered by CDIC insurance.
It is also important to note that CDIC coverage is limited to eligible deposits at member institutions only. It does not cover investments such as stocks, bonds, or mutual funds held at a financial institution, even if they were purchased through the financial institution. Therefore, it's important to understand the limits of CDIC coverage and consider other options for investment protection.
Canadian Investor Protection Fund (CIPF)
The Canadian Investor Protection Fund (CIPF) is a not-for-profit organization that provides protection to investors in the event of a member firm's insolvency. The CIPF was established in 1969 and is funded by its members, which include investment dealers and fund managers. A list of members can be found on the CIPF website, which essentially includes a lot of the larger asset wealth management firms in Canada.
CIPF coverage protects against the loss of cash, securities, and other property held by an investor as a result of a member firm's insolvency. The CIPF coverage limit is $1 million per account for all accounts combined, including registered and non-registered accounts. However, certain types of investments, such as commodities and futures contracts, are not covered by CIPF protection.
It is also important to note that CIPF coverage is not the same as protection against investment losses due to market volatility or other investment risks. CIPF protection only applies in the event of a member firm's insolvency, and it does not cover investment losses due to market fluctuations or other risks.
At the end of the day, Canadians' personal finances are generally well-protected through regulatory measures and financial institutions. Although the CDIC and CIPF act as guardians of the green and jointly help protect investors through deposit insurance and member firm investor protection, it’s important to understand the limitations of CDIC and CIPF coverage in order to consider additional protection for investments not covered by these organizations. Understanding the limitations can also educate an individual around risk management of their investments and money to guarantee that their entire basket of wealth is protected in some way shape or form as much as possible.
The security of one’s investments and funds is something we don’t typically think about, but being aware of the protective measures put in place can ensure that the security of one’s investments and funds is something we never have to think about.