ECO/VIS Mortgage Services Inc. v. Superintendent of Financial Services, 2012 ONFST 11

FINANCIAL SERVICES TRIBUNAL

2012 ONFST 11

Decision No. M0472-2011-1

Date: 2012/05/30

IN THE MATTER OF the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29 (the “Act”), in particular sections 7, 38 and 39; Ontario Regulation 188/08, in particular section 42; and Ontario Regulation 192/08, in particular section 3;

AND IN THE MATTER OF a Notice of Proposal from the Superintendent of Financial Services to impose a General Administrative Penalty of $1,500 on ECO/VIS Mortgage Services Inc. (“ECO/VIS”), dated July 28, 2011;

AND IN THE MATTER OF a Request for Hearing filed by Mr. Carmine Vescio on behalf of ECO/VIS, on August 18, 2011, pursuant to subsection 39(5) of the Act.

BETWEEN:

ECO/VIS MORTGAGE SERVICES INC.

Applicant

• and -

SUPERINTENDENT OF FINANCIAL SERVICES

Respondent

BEFORE:

Mr. Denis Boivin Member of the Tribunal and Chair of the Panel

Ms. Jennifer Brown Member of the Tribunal and Member of the Panel

Mr. Jeffrey Richardson Member of the Tribunal and Member of the Panel

APPEARANCES:

Mr. Carmine Vescio, representing the Applicant

Mr. Joe Nemet, representing the Respondent

HEARD:

March 9, 2012

REASONS FOR DECISION

A. INTRODUCTION

1. This hearing was requested by Mr. Carmine Vescio pursuant to subsection 39(5) of the Mortgage Brokerages, Lenders and Administrators Act, 2006 (the “Act”). Mr. Vescio is the principal broker of a mortgage brokerage called ECO/VIS Mortgage Services Inc. (“ECO/VIS”). On July 28, 2011, the Superintendent of Financial Services (“Superintendent”) issued a Notice of Proposal to impose an Administrative Monetary Penalty of $1,500 on ECO/VIS for its alleged failure to have the required errors and omissions insurance between July 2, 2010 and February 6, 2011, a period of approximately seven months.

2. Before the Tribunal, Mr. Vescio’s position was not without ambiguity. Despite the documentary evidence presented by counsel for the Superintendent and despite his own admission, Mr. Vescio submitted that ECO/VIS was not in contravention of the Act or regulations – that his brokerage did have liability insurance for the period at issue. In addition, he argued that he wanted to “suspend” the licence of ECO/VIS since his brokerage was inactive, and that employees from the Financial Services Commission of Ontario (“FSCO”) did not clearly indicate how to proceed in order to accomplish this goal. In the end, Mr. Vescio did not ask the Tribunal to reduce the proposed penalty, but to revoke the penalty altogether.

3. The Tribunal rejects the submissions made by Mr. Vescio. For reasons that follow, we find that ECO/VIS contravened the Act, that a monetary penalty would serve legitimate purposes, and that the amount of $1,500 is appropriate given the relevant circumstances. Accordingly, we direct the Superintendent to carry out his proposal.

B. STATUTORY FRAMEWORK

4. The authority to impose a General Administrative Penalty is found in sections 38 and 39 of the Act. When these provisions are read together, they provide that the Superintendent may impose an administrative penalty on a mortgage brokerage provided two substantive conditions are met:

a. The brokerage is contravening or not complying with or has contravened or not complied with a requirement established under the Act, other than a requirement for which a penalty is provided under section 40 or a requirement prescribed under subsection 55(5)(a).

b. The penalty is aimed at promoting compliance with the requirements of the Act or at preventing the brokerage from deriving an economic benefit from not complying with said requirements.

5. With respect to the first condition, counsel for the Superintendent submits that ECO/VIS contravened subsection 7(4) of the Act. According to this provision, every brokerage licensed under the Act is required to comply with the standards of practice prescribed by Ontario Regulation 188/08. In the present case, the relevant standard is found in section 42 of this Regulation: every brokerage licensed under the Act shall maintain errors and omissions insurance of at least $500,000 per occurrence and $1 million per policy period in a form approved by the Superintendent, with extended coverage for loss resulting from fraudulent acts, or shall have some other form of assurance approved by the Superintendent.

6. With respect to the amount of the administrative penalty, section 41 of the Act provides a maximum penalty of $25,000 for a brokerage such as ECO/VIS. In addition, Ontario Regulation 192/08 states that the Superintendent is authorised to determine the amount of the penalty up to this limit having regard only to the five criteria listed in section 3 of this Regulation. These criteria are discussed below in the context of the Tribunal’s analysis.

7. Lastly, according to subsection 39(6) of the Act, when the Tribunal has held a hearing following a notice of proposal to impose an Administrative Monetary Penalty, the Tribunal may, by order, direct the Superintendent to carry out the proposal, with or without changes, or substitute its opinion for that of the Superintendent. The wording of this provision suggests that hearings held pursuant to subsection 39(5) of the Act are de novo hearings. Accordingly, the Tribunal need not show any deference to the Superintendent’s determination with respect to whether a proper basis exists for imposing a penalty on a licensee, or with respect to the amount that is appropriate in light of the circumstances of the case.

C. ISSUES

8. The issues raised by this hearing were described as follows in the Pre-hearing Conference Memorandum dated October 25, 2011:

a. Was ECO/VIS in breach of subsection 7(4) of the Act and section 42 of Regulation 188/08 between July 2, 2010 and February 6, 2011?

b. In the affirmative, would a monetary penalty promote compliance with the Act or prevent ECO/VIS from deriving a benefit from its contravention, within the meaning of section 38 of the Act?

c. In the affirmative, what is the appropriate amount of the penalty having regard to the five criteria listed in section 3 of Regulation 192-08?

D. EVIDENCE

9. The parties did not file an Agreed Statement of Facts with the Tribunal. However, counsel for the Superintendent began the hearing by observing that Mr. Vescio was in agreement with paragraphs 2, 5 and 6 of the reasons attached to the Notice of Proposal dated July 28, 2011 – a statement that Mr. Vescio immediately confirmed to the Chair of the panel. These three paragraphs read as follows:

10. ECO/VIS is licensed as a mortgage brokerage under the Act and has been licensed since March 26, 2008.

11. The Superintendent conducted an audit of mortgage brokerages and determined that ECO/VIS did not have E&O coverage from one of the approved providers from July 2, 2010, to February 6, 2011.

12. The Superintendent notified ECO/VIS in December 2010 that the audit had determined that ECO/VIS did not have E&O insurance. All contacts with the brokerage or its representatives were to an email address or mailing address provided by the brokerage or its representatives and on file. In December 2010, the brokerage replied that they had not done any business and wished to surrender their brokerage licence. A Surrender of Brokerage Licence Declaration form was e-mailed to the brokerage, however, subsequently the brokerage wished to retain the licence. In February 2011, the brokerage provided proof of insurance effective February 7, 2011. No proof of insurance for the period of July 2, 2010, to February 6, 2011, was provided.

13. In addition, the parties jointly filed an Agreed Book of Documents (the “ABD”) that contains copies of electronic correspondence between Mr. Vescio and staff of the Financial Services Commission of Ontario (“FSCO”). These exchanges occurred between December 14, 2010 and February 16, 2011, and provide valuable context for assessing the submissions made by Mr. Vescio. Accordingly, what follows is a detailed synopsis of these electronic messages:

a. On December 14, 2010, a representative of FSCO notified Mr. Vescio that a recent audit had determined that ECO/VIS did not have E&O insurance. He was asked to provide proof of coverage and indicate whether the brokerage had conducted any mortgage business. The electronic message stated that a response was required by December 21, 2010. [ABD – Tab 2]

b. On December 21, 2010, Mr. Vescio replied to the email of December 14th. He said that he did not conduct any mortgage business in 2010 and that “I would like to surrender my lisence”. He added: “Please send form and I will fill it out ASAP.” However, he also added the following: “I have no intention of doing mortgage activities since renewal maech [sic] 31 2010 but to hold my lisence only”. [ABD – Tab 2]

c. On January 27, 2011, a representative of FSCO sent a Surrender of Brokerage Licence Declaration form to Mr. Vescio and asked him to return the completed form by February 3, 2011. [ABD – Tab 3]

d. Mr. Vescio replied within an hour to the electronic message of January 27th. His reply began as follows: “To be clear I do not want to give up my licence in any way. My intention is to suspend all mortgage activities from march 2010 to the next cycle.” Next, he said that he was informed that mortgage brokers had a “2-year cycle to suspend activities” and that he had already paid the renewal fee for his licence. In conclusion, Mr. Vescio asked for guidance “on what is the appropriate form to fill out and sign in order to keep and maintain my license while all mortgage activities are suspended”. [ABD – Tab 3]

e. On January 28, 2011, a representative of FSCO replied to Mr. Vescio’s message of the previous day. In this brief response, Mr. Vescio is told that he must immediately obtain E&O insurance if he plans to continue operating as a mortgage brokerage and that non compliance could lead to regulatory action being taken. [ABD – Tab 4]

f. On January 28, 2011, Mr. Vescio replied as follows: “Thank you for your immediate response. I will obtain errors and omissions insurance to comply.” However, he then posed a number of questions regarding the renewal fee that he already paid for his mortgage broker licence and about “the proper procedure of how to be an inactive mortgage broker”. [ABD – Tab 4]

g. On February 4, 2011, a representative of FSCO sent the following electronic message to Mr. Vescio, in response to his message of January 28th: [ABD – Tab 5]

This email is further to your questions below. There appears to be some confusion between the “brokerage” licence and your “broker” licence.

Brokerage licences are permanent until surrendered, suspended etc. Broker licences run on a two year cycle. It is the responsibility of the brokerage to maintain e&o insurance.

Broker licences which are not renewed have their status changed to “not authorized to sell” until the end of that two year renewal period or until the fee is paid and the status changed to “authorized to sell”. No business can be conducted by the individual while the status of the broker licence [is] “not authorized to sell”. The holder of this individual licence does not require e&o for himself/herself.

More specifically the e&o insurance is for Carmine Vescio Real Estate Services Inc. If this entity has an active licence it must have insurance regardless of the level of activity. If the brokerage licence is surrendered, the status of your individual licence will be “not authorized to sell”. You can then either join another brokerage or re-apply to licence a brokerage and change your individual status to active prior to March 31, 2012.

h. On February 8, 2011, Mr. Vescio wrote-back to FSCO and indicated that they would receive a certificate of insurance “some time tomorrow”. He thanked the recipient for her patience and added that he would be considering his options in the meantime – “to transfer my licence to another broker or surrender my brokerage licence until such time I want to deal in mortgages again”. [ABD – Tab 5]

i. On February 11, 2011, a representative of FSCO once again requested a copy of the Applicant’s current E&O insurance coverage. The deadline for responding to this latest request was February 15, 2011. [ABD – Tab 5]

j. On February 16, 2011, Mr. Vescio sent a certificate of insurance to FSCO by electronic mail. This certificate states that ECO/VIS was insured from February 7, 2011 to July 1, 2011. The premium for this five-month period was $392. In the message, Mr. Vescio stated that he had already sent this certificate on February 11, 2011. [ABD – Tab 5]

11. With the consent of Mr. Vescio, the Tribunal also received into evidence an affidavit sworn by Mr. Anatol Monid, the Director of the Market Regulation Branch, Licensing and Market Conduct Division, of FSCO. A copy of this affidavit had been provided to Mr. Vescio in January of 2012 and Mr. Monid was available at the hearing for the purpose of cross-examination. The affidavit covers a number of topics, including the fact that the regulatory system established by the Act and regulations depends on voluntary compliance on the part of licensees, that this system was designed to protect the public, and that the E&O requirement is the safeguard that “most clearly and directly protects the public”. In addition, Mr. Monid states that the E&O requirement is imposed on licensed brokerages, whether or not the brokerage actually carries on business or brokers a completed mortgage transaction. He explains that a brokerage licence authorises a person or entity to carry on the business of “dealing in mortgages” and “trading in mortgages”, and that the former expression includes a broad range of activities that can take place without a completed mortgage transaction occurring. Given this reality, Mr. Monid states that there is no practical way for a regulator to know whether a brokerage is doing business, on any given day. Accordingly, the E&O requirement attaches to the licence itself, and not to the activities of the brokerage.

12. The affidavit of Mr. Monid also describes the audits that were conducted by FSCO, in 2008 and 2010, in order to determine compliance with the E&O requirement and the progressive approach to enforcement taken by the Superintendent with respect to contraveners. For example, following the 2008 audit, it was determined that 30% of licensed brokerages did not have the required liability insurance. They were all contacted and encouraged to get in compliance. As a result, many brokerages obtained insurance, while others surrendered their licences. For those that did not comply, the Superintendent issued notices to impose administrative penalties. Of significance, the affidavit states that the rate of non-compliance had dropped to 6.1% after the 2010 audit, an improvement that Mr. Monid attributes to a number of factors, including education, enforcement measures taken by FSCO and an increased awareness within the mortgage industry with respect to enforcement outcomes.

13. Finally, the affidavit of Mr. Monid discusses the factors that were considered by the Superintendent in proposing administrative penalties of $1,000 (following the 2008 audit) and $1,500 (following the 2010 audit) for first-time offenders. According to Mr. Monid, a penalty of less than $1,000 would signal that non-compliance was not taken seriously. In addition, since the cost of E&O insurance ranged between $800 and $1,200, it was believed that any penalty would have to be high enough to negate any financial benefit obtained by the brokerage from not complying with the requirement. With respect to the increase in the minimum penalty, Mr. Monid observes that the E&O requirement is no longer new; the industry participants have had over three years to become aware of the requirement to maintain E&O coverage.

14. The Tribunal also received evidence from Mr. Vescio, the principal broker of the Applicant. He testified under oath with respect to a number of issues, some of which were not directly relevant to the issues before the Tribunal. For example, he said that FSCO had sent mail to the wrong address in the past, but still conceded that the electronic messages referred to above had all been received by him. In addition, he presented the panel with a one-page document entitled “Endorsement – Extended Reporting Period” (the “Endorsement”). During his submissions, he argued that this document established that ECO/VIS was insured during the period identified in the Superintendent’s Notice of Proposal. There is nothing on the Endorsement that mentions ECO/VIS by name or by necessary implication, but the Tribunal accepted Mr. Vescio’s testimony that the document related to his brokerage. According to this Endorsement, the following coverage was provided effective July 1, 2010:

It is agreed that coverage granted by this endorsement will begin immediately following the date of cancellation or expiry date in the case of non-renewal and will run for one (1) year. It will cover CLAIMS first made against the INSURED and reported during the extended Reporting Period and caused by such negligent acts, errors and omissions occurring during any prior consecutive policy periods covered by this policy, renewal thereof, or any policy issued by the INSURERS which this policy replaced.

[Emphasis added]

15. Mr. Vescio also testified about the electronic communications between himself and FSCO that occurred between December 14, 2010 and February 16, 2011. According to him, “there was confusion between myself and them” about the procedure involved and “I did not get sufficient information in reply to my questions”. He did not want to give up his licence; he just wanted to suspend his activities. He thought the Surrender of Brokerage Licence Declaration form sent to him on January 27, 2011, meant that he would give up his licence forever and that he would have to go back to school to satisfy the educational requirements of his licence. In addition, Mr. Vescio confirmed that ECO/VIS was in compliance during the first two years of its licence, between July 1, 2008 and July 1, 2010. His brokerage concluded between 5-10 transactions during this period and paid approximately $1,000 per year for E&O insurance. When the witness was asked why the insurance was not renewed, he replied that he thought it was not required because his brokerage was not carrying-on any business.

E. ANALYSIS

1) Issue 1: The Contravention

16. With respect to the first issue, the Tribunal concludes that ECO/VIS was in contravention of the Act. For a period of approximately seven months (from July 2, 2010 to February 6, 2011), the Applicant brokerage was in contravention of the requirement imposed by subsection 7(4) of the Act, namely, the requirement to comply with the standards of practice prescribed for brokerage licences. Liability insurance is a standard prescribed by section 42 of Ontario Regulation 188/08 and Mr. Vescio, as principal broker for ECO/VIS, had the statutory obligation to carry out his powers and duties in accordance with said regulation: subsection 7(6) of the Act.

17. Section 42 of Ontario Regulation 188/08 creates no distinction whatsoever on the basis of whether the licensed brokerage actually conducts any business with respect to mortgages. On the contrary, the requirement to maintain liability insurance is a standard of practice that applies to “every brokerage licence that is issued under the Act”: section 4 of Ontario Regulation 188/08 [emphasis added]. There are good reasons for this, as explained by Mr. Monid in his affidavit. Under the Act, brokerage licences authorise a person or entity to carry on the business of “dealing in mortgages” (as defined in section 2 of the Act) and “trading in mortgages” (as defined in section 3). The former expression includes a broad range of activities that can take place without a completed mortgage transaction occurring. Given this reality, there is no practical way for the Superintendent or FSCO to know whether a brokerage is carrying on the business of dealing or trading in mortgages, on any given day. Accordingly, the E&O requirement attaches to the licence itself and not to the activities of the brokerage. As long as a brokerage holds a licence to conduct business under the Act, its failure to have liability insurance constitutes an infringement of subsection 7(4) of the Act.

18. The Endorsement relied upon by Mr. Vescio, during the hearing, does not change the fact that ECO/VIS was in contravention of the Act between July 2, 2010 and February 6, 2011. Indeed, the wording underlined above makes it clear that the extended coverage offered by this Endorsement applies only to negligent acts, errors and omissions that occurred during the time that ECO/VIS was insured by the policy that lapsed on July 1, 2010. This Endorsement offered no protection whatsoever with respect to negligent acts, errors and omissions that occurred between July 2, 2010 and February 6, 2011, the only timeframe that is relevant for present purposes.

2) Issue 2: The Statutory Purposes

19. With respect to the second issue, the Tribunal concludes that both purposes listed in subsection 38(1) of the Act would be served by the imposition of an administrative monetary penalty on ECO/VIS. Even though there is no evidence that the Applicant conducted any mortgage business during the period in question, the brokerage remained licensed and benefited from not having to pay the E&O premiums that were required in order to comply with the Act – premiums that Mr. Vescio had paid during the first two years of ECO/VIS’s licence. Furthermore, the imposition of a monetary penalty on ECO/VIS serves to remind this brokerage – an entity that remains licensed under the Act to deal and trade in mortgages – that liability insurance is one of the most important public safeguards under the Act and that it is not conditional on the level of business conducted in any given year.

3) Issue 3: The Quantum

20. In determining the amount of ECO/VIS’s penalty, the Tribunal must take into account only the five criteria listed in section 3 of Ontario Regulation 192/08, just as the Superintendent was obliged to limit himself to those criteria in the first instance. Having reviewed the evidence and submissions, the Tribunal makes the following findings with respect to the application of these criteria to the circumstances of this case:

a. The degree to which ECO/VIS’s contravention was intentional, reckless or negligent: Mr. Vescio knew about the requirement for E&O insurance, since ECO/VIS had insurance in place during the first two years it was licensed. In his testimony, Mr. Vescio provided the following rationale for not renewing the policy of his brokerage in July of 2010: he did not think it was required, because the brokerage would not be conducting any business during the upcoming year. The Tribunal finds this explanation hard to believe, given the fact that the requirement for E&O coverage is no longer new and that ECO/VIS has been licensed since July of 2008. At the very least, Mr. Vescio should have confirmed his belief with FSCO, if he was truly under this impression. There is no evidence that he made any inquiries regarding this question. Accordingly, the Tribunal finds that the Applicant’s contravention of subsection 7(4) of the Act was reckless; it was the result of the wilful blindness of its principal broker.

b. The extent of the harm or potential harm to others resulting from ECO/VIS’s contraventions: There is no evidence that ECO/VIS engaged in any mortgage business between July 2, 2010 and February 6, 2011. Nonetheless, potential harm to the public existed by virtue of the fact that ECO/VIS was licensed to deal and trade in mortgages, even though this brokerage did not have the insurance coverage required by law and even though the Superintendent had no practical way of ensuring that the brokerage was not dealing or trading in mortgages.

c. The extent to which ECO/VIS took any remedial actions: The Applicant took some steps to mitigate its failure to have E&O coverage. In particular, Mr. Vescio replied to the email sent by a representative of FSCO on December 14, 2010, and indicated a desire to “surrender my lisence [sic]”. Following this initial exchange, the evidence suggests that Mr. Vescio became confused about a number of things, including the meaning of “surrender” and the nature of the “licence” that he had asked to surrender. However, he expressed his concerns to FSCO and they replied to his queries in a timely manner. Indeed, the electronic messages sent by FSCO on January 28, 2011 [ABD – Tab 4] and February 4, 2011 [ABD – Tab 5] were clear: they explained the consequences of surrendering ECO/VIS’s brokerage licence and expressed the importance of securing E&O coverage, if Mr. Vescio did not want to surrender the licence of ECO/VIS. On both occasions, Mr. Vescio thanked the writer and indicated that he would be obtaining insurance – something he did on February 7th. Accordingly, the Tribunal rejects Mr. Vescio’s suggestion that FSCO somehow contributed to his own misunderstandings or that there was a problem of communication between himself and FSCO. This being said, the fact remains that ECO/VIS cooperated with FSCO and took remedial actions within two months of being notified of the results of the 2010 audit. This does not excuse the contravention, but constitutes a relevant factor under section 3 of Ontario Regulation 192/08.

d. The extent to which ECO/VIS derived any economic benefit from its contravention: The Applicant ECO/VIS obtained a modest economic benefit by virtue of retaining a licence to carry on a mortgage brokerage business, while avoiding payment of E&O premiums for approximately seven months. The certificate of insurance introduced into evidence shows that ECO/VIS obtained coverage from February 7, 2011 to July 1, 2011 (a five-month period) for $392 or $78.40 per month [ABD – Tab 5]. On the basis of this evidence, it is reasonable to infer that ECO/VIS obtained a benefit of approximately $550 from not complying with the Act.

e. Any other contraventions by ECO/VIS during the preceding five years: This criterion has no application in the circumstances of this case. There was no suggestion that ECO/VIS has, in the past, failed to comply with any other requirement under the Act or with any other legislation.

21. In view of these findings, the Tribunal concludes that the appropriate monetary penalty for ECO/VIS’s contravention of the Act is $1,500.

F. ORDER

22. The Tribunal directs the Superintendent, by order, to carry out his proposal to impose an administrative monetary penalty of $1,500 on ECO/VIS.

DATED at the City of Toronto, this 30th day of May, 2012.

“Denis Boivin”

Denis Boivin Member of the Tribunal and Chair of the Panel

“Jennifer Brown”

Jennifer Brown Member of the Tribunal and Member of the Panel

“Jeffrey Richardson”

Jeffrey Richardson Member of the Tribunal and Member of the Panel