Borrowing and Lending Between CFP Professionals and Clients: Ethical Considerations and Regulatory Framework

The financial planning profession is built on trust and the fiduciary duty to act in the best interests of clients. This duty extends to all aspects of the client-advisor relationship, including the handling of financial transactions. One area where conflicts of interest can arise is in the borrowing and lending of money between CFP professionals and their clients.

Prohibition on Borrowing and Lending

The Code of Ethics and Standards of Conduct of the Certified Financial Planner Board of Standards (CFP Board) clearly prohibits CFP professionals from directly or indirectly borrowing money from or lending money to a client, except under specific circumstances. This prohibition is in place to protect clients from potential conflicts of interest and to ensure that CFP professionals are acting in their clients’ best interests at all times.

Exceptions to the Prohibition

There are a few exceptions to the prohibition on borrowing and lending between CFP professionals and clients. These exceptions are as follows:

• Family Members: A CFP professional can borrow money from or lend money to a client if the client is a member of the CFP professional’s family.
• Business Organizations: A CFP professional can borrow money from or lend money to a client if the lender is a business organization or legal entity in the business of lending money.

Conditions for Permissible Lending Arrangements

If a CFP professional wishes to engage in borrowing or lending with a client, certain conditions must be met. These conditions are as follows:

• Written Procedures: The member firm must have written procedures allowing borrowing and lending between registered persons and customers.
• Conditions for Borrowing or Lending: The borrowing or lending arrangement must meet one of the following conditions:
  • Immediate Family: The customer is a member of the registered person’s immediate family.
  • Financial Institution or Entity: The customer is a financial institution regularly engaged in the business of providing credit, financing, or loans, or another entity or person that regularly arranges or extends credit in the ordinary course of business.
  • Same Member Registration: The customer and the registered person are both registered persons of the same member.
  • Personal Relationship: The lending arrangement is based on a personal relationship with the customer, such that the loan would not have been solicited, offered, or given had the customer and the registered person not maintained a relationship outside of the broker-customer relationship.
  • Business Relationship: The lending arrangement is based on a business relationship outside of the broker-customer relationship.
• Notification and Approval: Depending on the type of borrowing or lending arrangement, the registered person may need to notify and receive written pre-approval from the member firm.

Conclusion

The prohibition on borrowing and lending between CFP professionals and clients is in place to protect clients from potential conflicts of interest and to ensure that CFP professionals are acting in their clients’ best interests at all times. There are a few exceptions to the prohibition, but these exceptions are narrowly defined and subject to strict conditions. CFP professionals who wish to engage in borrowing or lending with a client should carefully review the CFP Board’s Code of Ethics and Standards of Conduct and consult with their compliance officer to ensure that they are in compliance with all applicable rules and regulations.

References:

• CFP Board Code of Ethics and Standards of Conduct
• FINRA Rule 3240: Borrowing From or Lending to Customers

FAQs

Can a CFP professional borrow money from a client?

• Answer: No, CFP professionals are prohibited from directly or indirectly borrowing money from clients, except under specific circumstances.

What are the exceptions to the prohibition on borrowing from clients?

• Answer: The exceptions are:
  • Borrowing from family members
  • Borrowing from business organizations in the business of lending money

What conditions must be met for a permissible lending arrangement between a CFP professional and a client?

• Answer: The conditions are:
  • The member firm must have written procedures allowing borrowing and lending between registered persons and customers.
  • The borrowing or lending arrangement must meet one of the following conditions:
    • The customer is a member of the registered person’s immediate family.
    • The customer is a financial institution regularly engaged in the business of providing credit, financing, or loans.
    • The customer and the registered person are both registered persons of the same member.
    • The lending arrangement is based on a personal relationship with the customer.
    • The lending arrangement is based on a business relationship outside of the broker-customer relationship.

Does the CFP professional need to notify the member firm of the borrowing or lending arrangement?

• Answer: Yes, the CFP professional must notify the member firm of the borrowing or lending arrangement and receive written pre-approval, except in certain cases.

What are the potential consequences of violating the prohibition on borrowing from clients?

• Answer: Violating the prohibition on borrowing from clients can lead to disciplinary action by the CFP Board, including suspension or revocation of the CFP certification.

What should a CFP professional do if they need to borrow money from a client?

• Answer: A CFP professional should carefully consider the potential conflicts of interest and seek legal advice before engaging in any borrowing or lending arrangement with a client.

What are some alternatives to borrowing money from a client?

• Answer: CFP professionals can explore other options for borrowing money, such as obtaining a loan from a bank or credit union or using personal savings.

How can CFP professionals avoid conflicts of interest when dealing with clients?

• Answer: CFP professionals can avoid conflicts of interest by maintaining a clear separation between their personal and professional lives, disclosing any potential conflicts of interest to clients, and always acting in the best interests of their clients.