Prediction Markets in Canada: A Practical Compliance Playbook for Complex Products
Part 2 of a 3‑part series on prediction markets in Canada.
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Prediction markets are not being characterized as classic “investment contracts” or “shares/units,” but as over‑the‑counter derivatives in the form of binary options, governed by securities/derivatives provisions rather than by gaming law alone. While prediction markets are often assumed to belong exclusively in the Order Execution Only (“OEO”) space, nothing in the current framework prevents them from being offered through advised channels. That said, they may not fit cleanly into existing retail compliance playbooks. Rather than discarding the Client Focused Reforms (“CFR”) architecture, firms will need to sharpen and extend it to address the distinct characteristics of event contracts. Regulators have offered principles rather than a blueprint, leaving legal and compliance teams with the task of defining what practical compliance looks like for this emerging product type.
Anchoring event contracts in a robust Know Your Product (“KYP”) record, a behaviour‑aware Know Your Client (“KYC”) process, and a defensible suitability or appropriateness framework can provide a coherent rationale for who gains access, under what conditions, and why. The infrastructure already in place for complex products—tiered access models, exposure limits, product‑governance oversight, and surveillance—can be repurposed, provided it is sensitively adapted to the specific mechanics, risks, and behavioural dynamics of prediction markets.
Where prediction markets sit in the CFR universe
The Canadian Investment Regulatory Organization’s (“CIRO”) approval for Wealthsimple to provide prediction markets to clients, along with CIRO’s prediction market Bulletin from March 2026 do not expressly address the application of CFR to prediction markets. The CIRO Bulletin is generally framed around how existing CIRO conduct, suitability, conflicts, advertising and leverage rules apply to event contracts. But for advised clients, the details of CFRs apply to prediction markets as they do elsewhere.
The interesting question is how registered firms will have to reconsider operationalizing their KYC, KYP, and suitability procedures, supervision, and controls to accommodate prediction markets.
Event contracts concentrate several regulatory sensitivities in one product:
Binary payoff and risk of total loss on individual positions.
Short time horizons
Potential for gambling‑like user behaviour despite a securities context.
Multiple risk elements that in some cases diverge from typical investment products
Novel subject matter that does not map neatly onto traditional asset classes.
That combination all but guarantees these contracts will be treated internally by firms as “complex/novel/high‑risk” products. The broader question for firms looking to offer prediction markets is how to operationalize their existing CFR framework so that, if challenged, they can demonstrate robust compliance.
Re‑tooling KYP: for a brand new product
For most dealers, KYP documentation for most of the securities on their product shelf exists in data dictionaries and shelf summaries, sometimes grouped in buckets of various types of securities. Event contracts will likely need a somewhat different KYP treatment, closer to structured notes or crypto assets, but also with unique considerations such as tenor and subject matter.
A credible KYP dossier for prediction markets would likely cover at least:
Mechanics: payoff structure, reference event, settlement source, scenarios for both obvious and edge‑case outcomes (e.g., data revisions, index methodology changes, cancellation of an event).
Risk inventory: market risk, event risk, liquidity risk, data/benchmark risk, operational risk (including outcome‑dispute risk), and behavioural risk (propensity to small and speculative trades).
Comparables and alternatives: which existing products can deliver similar exposures (e.g., macro futures, options, ETFs) and how the risk/complexity compares.
Target market: risk tolerance bands, knowledge/experience expectations, time horizons, and objectives (e.g., speculation or macro hedging, not income or preservation).
Internal limits: caps on notional exposure, concentration, and frequency, tied back to the above elements.
Subject matter: with CIRO’s restrictive stance on subject matter, subject matter edge cases may dominate KYP discussions.
The practical outcome is that once the necessary KYP adjustments for prediction markets are understood and applied, prediction markets need to be added to the firm’s product‑approval and review cycle with the same discipline as any other complex derivative: initial sign‑off, periodic review, and a documented rationale for both the product’s presence on the shelf and its assigned complexity tier.
Deepening KYC: what you need to know about the client
Standard retail KYC may not be enough to justify access to event contracts. To make KYC usable for prediction‑market suitability, firms may need to consider how to integrate the following additional elements:
Add complexity‑specific fields: client experience with derivatives/options, understanding that product can go to zero, comfort with short‑term speculative positions, and prior use of similar products (if available).
Experience with prediction markets: the client has a conversation with a representative, or even completes a concise module that tests understanding, about payoff, risk of total loss, time horizon, and the product’s purpose. The outcome is not just an “I understand” checkbox; it drives whether access is granted, constrained, or declined.
Refine risk tolerance/capacity, and the resulting client risk profile: differentiating between willingness to take risk in diversified portfolios and willingness to take concentrated binary risk, and understanding downstream consequences.
Clarify client objectives: explicitly distinguishing between “trading/speculation” and “gambling/entertainment,” even if the latter is never used in client‑facing language. If a client’s objectives and behaviour look like the latter, that should feed back into access decisions and risk assessments.
Time horizon: a meaningful conversation with the client documenting their understanding of how their investment time horizon may be impacted by prediction market purchases.
Conflicts of interest and the responsible gaming lens
Because event contracts offered through prediction markets are securities, firms must treat them as fully subject to existing conflict-of-interest identification, control, and disclosure requirements under the CFRs and applicable CIRO rules. At the same time, the design and use of prediction markets can resemble gaming products, particularly if clients engage in frequent, small, speculative trades that act more like entertainment than portfolio construction. This blurring of lines creates a layered conflict landscape: firms earn revenue when clients trade more, yet they also have an obligation to act fairly with clients.
One practical way to manage these conflicts could be to borrow from the responsible gaming tool‑kit developed by the Alcohol and Gaming Commission of Ontario and iGaming Ontario, including hard and soft limits, time‑outs, clear risk messaging, and proactive outreach when usage patterns raise concern. While the securities and gaming regimes are distinct, a conflicts program that is explicitly informed by responsible gaming concepts—such as limiting the promotion of event contracts as a “quick win,” building responsible‑use controls into product design, and training staff to recognize problematic patterns—could help to demonstrate that the firm has taken reasonable steps to resolve conflicts in the client’s best interest. See our article “Balancing Gamification and Conflicts of Interest: What Retail Investing Can Learn from the Ontario Gaming Player Safety Approach” for more details.
Suitability and appropriateness: building a defensible gate
In an advisory context, the suitability challenge is obvious: any recommendation to trade event contracts will invite close regulatory scrutiny.
A practical retail suitability path might look like this:
Segmented access: internal rules could tie access levels to KYC and particularly product knowledge and risk—for example, full access for higher‑knowledge, higher‑tolerance clients; restricted limits or no access for conservative, low‑knowledge, or conflicted profiles.
Hard and soft limits: combine absolute caps (per contract, per client, per account value) with soft limits that trigger warnings, education, or cooling‑off periods. Breaches of hard limits should be technically impossible absent supervisory override; breaches of soft limits should leave an audit trail if they are repeatedly ignored.
Alternatives lens: alternative products should be clearly explained and documented.
Who should be allowed in?
Conceptually, there is no requirement that prediction markets be limited to accredited or institutional clients. But a credible framework is unlikely to treat them as universally appropriate for all retail clients.
A defensible target market would be:
Adults with at least moderate investment knowledge and some demonstrated understanding of simple derivatives or options.
Clients whose stated risk tolerance is not “low,” and whose financial circumstances and risk capacity allow them to bear the loss of the capital allocated to these contracts.
Clients whose objectives include growth/speculation or hedging macro/climate/market views, as opposed to exclusively preservation or income.
Clients who plan use the product within reasonable limits, rather than as a primary outlet for risk‑taking.
That does not mean prediction markets become a niche institutional product, but it does mean that “everyone who can open an account” may be too broad an aperture for prediction markets. The regulatory trend is towards finer segmentation and demonstrable restraint with complex products; event contracts are unlikely to be an exception.
Operationalizing policies and controls
To move from theory to practice, firms will need consider how to embed these ideas in procedures, documentation, controls, supervision, and systems, not just compliance manuals.
Key operational steps include:
Building parameters for the product: creating whitelists/blacklists and leverage prohibitions into the product configuration layer so non‑compliant markets cannot be opened.
Embedding eligibility logic: coding client‑segment rules (based on KYC information) directly into order‑validation and account‑permission granting engines. If a client falls outside a defined risk/experience band, the system simply will not permit trades beyond set limits.
Behavioural surveillance: firms could consider extending trade‑surveillance tools to flag markers of problematic use, such as sequences of small speculative trades, repeated trading right after warnings, unusual reactions to losses, and routing those alerts to supervision teams with clear escalation paths. Integrate dynamic signals: treat behavioural data (frequency, chasing losses, breaching soft limits) as a supervision issue.
Governance feedback loop: to ensure robust supervision, firms could feed thematic findings (e.g., high rates of failed appropriateness checks, clusters of complaints, or concerning behavioural patterns) back into product‑governance and KYP reviews so limits and eligibility criteria can be adjusted where needed.
For firms considering prediction markets, the opportunity is to move early, adjust their existing CFR approach to suit these new products. That means documenting product parameters and subject‑matter boundaries, encoding eligibility and limit logic into systems, and treating behavioural data as a potential input into supervision. Firms that can demonstrate a clear rationale for their target market, a credible control environment, and a feedback loop that tightens limits when risk signals emerge will be best positioned to withstand regulatory scrutiny as Canadian practice around event contracts evolves.
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Coming next: The third installment of North Star’s 3-part series on prediction markets.
Part 3: Prediction Markets in Canada: The US Example and the Canadian Opportunity
See also the previously published Part 1 - Prediction Markets in Canada: Where Securities End and Gaming Might Begin.
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Next Steps
Choose the North Star Group as your partner for legal and regulatory compliance support. North Star’s team of former compliance officers, regulators, educators, and private practice lawyers are ready to help you confirm that compliance and legal expectations are addressed, report to your stakeholders on the effectiveness of your compliance program, and most importantly ensure that clients’ trust in your firm is secure.
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About the Authors
Michael Holder (B.A. Western, LL.B. Windsor, MBA, Western) is the Managing Partner of North Star Legal, bringing more than 20 years of wealth management, legal, and compliance experience in Canada’s financial services sector. Having acted as Associate General Counsel and Chief Compliance Officer of Wealthsimple, Senior Legal Counsel at BMO Financial Group and a partner of one of Canada’s largest firms, Michael combines his practice and advisory work with teaching Fintech and Disruption of Banking at Ivey Business School.
Read Michael’s full bio here.
Martha Rafuse (B.A. Western, LL.B. Osgoode, LL.M London School of Economics), Counsel at North Star Legal, brings more than two decades of securities regulatory experience across the financial industry, private practice, and government. Before joining North Star Legal, Martha led large compliance teams for both Canadian and U.S. firms, including RBC Phillips, Hager & North Investment Counsel Inc., RBC Dominion Securities Inc. (Retail), and RBC Royal Mutual Funds. As Legal Counsel at the Ontario Securities Commission, Martha developed legal solutions for novel regulatory issues and led significant policy initiatives.
Read Martha’s full bio here.