Glenn David Martin v. Superintendent of Financial Services, 2012 ONFST 12

FINANCIAL SERVICES TRIBUNAL

2012 ONFST 12

Decision No. M0486-2011-1

Date: 2012/05/31

IN THE MATTER OF the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29 (the “Act”), in particular sections 7, 19, 21, 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 issued by the Superintendent of Financial Services on September 13, 2011, to revoke the brokerage licence of Glenn David Martin (“GDM”) and a Notice of Proposal issued on the same day to impose an Administrative Monetary Penalty of $3,000 on GDM;

AND IN THE MATTER OF a Request for Hearing filed by Mr. Glenn Martin on behalf of GDM, on September 30, 2011, pursuant to subsections 21(3) and 39(5) of the Act.

BETWEEN:

GLENN DAVID MARTIN

Applicant

• and -

SUPERINTENDENT OF FINANCIAL SERVICES

Respondent

BEFORE:

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

Ms. Florence Holden Vice-Chair of the Tribunal and Member of the Panel

APPEARANCES:

Mr. Glenn Martin, representing the Applicant

Mr. Stephen Scharbach, representing the Respondent

HEARD:

March 16, 2012

REASONS FOR DECISION

A. INTRODUCTION

1This hearing was requested by Mr. Glenn Martin pursuant to subsections 21(3) and 39(5) of the Mortgage Brokerages, Lenders and Administrators Act, 2006 (the “Act”). Mr. Martin is the principal broker of Glenn David Martin (“GDM”), a mortgage brokerage carrying his name. On September 13, 2011, the Superintendent of Financial Services (the “Superintendent”) issued two notices with respect to this brokerage: one notice proposing to revoke the licence in question – a proposal that is no longer before the Tribunal – and one notice proposing to impose an administrative monetary penalty of $3,000 on the brokerage.

2Both proposals stem from the same allegation. The Superintendent claims that the brokerage GDM twice failed to have the required errors & omissions (“E&O”) insurance: between July 1, 2008 and November 28, 2008 and between April 2, 2010 and December 19, 2010. During the hearing, the principal broker of GDM accepted this allegation, but argued that the amount of the penalty was not proportional with the circumstances. In particular, Mr. Martin emphasised that his brokerage had not conducted any business during the relevant timeframe and that GDM’s licence had been voluntarily surrendered in October of 2011. In his opinion, an appropriate sanction would be a $1,000 monetary penalty.

3The Tribunal rejects the submissions made by Mr. Martin. For reasons that follow, we find that GDM contravened the Act on two distinct occasions, that a monetary penalty would serve legitimate purposes, and that the amount of $3,000 is both proportional and appropriate. Accordingly, we direct the Superintendent to carry out his proposal to impose an administrative monetary penalty of $3,000 on the brokerage GDM.

B. STATUTORY FRAMEWORK

4The Act authorizes the Superintendent to issue a mortgage brokerage licence. Subsection 2(2) of the Act prohibits a person or entity from carrying on the business of dealing in mortgages in Ontario without a mortgage brokerage licence. Section 7 of the Act provides for such licenses. The authority to impose an administrative monetary 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.

5With respect to the first substantive condition, counsel for the Superintendent submits that the Applicant GDM 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 as may be prescribed including 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 E&O 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.

6With 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 GDM. 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.

7Lastly, according to subsection 39(6) of the Act, when the Tribunal has held a hearing following a notice of proposal to impose a General Administrative 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

8During the hearing, Mr. Martin conceded that his brokerage was in breach of subsection 7(4) of the Act and section 42 of Regulation 188/08 on two distinct occasions, namely, between July 1, 2008 and November 28, 2008 and between April 2, 2010 and December 19, 2010. In addition, on October 3, 2011, the Superintendent accepted Mr. Martin’s application to surrender the brokerage licence of GDM. Accordingly, this hearing raises only two questions:

a. Would a monetary penalty promote compliance with the Act or prevent GDM from deriving a benefit from its contravention, within the meaning of section 38 of the Act?

b. 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

9Most of the evidence that is relevant to these issues is contained in an Agreed Statement of Facts and an Agreed Book of Documents filed with the consent of both parties and received by the Tribunal. On the basis of this documentary evidence, the Tribunal makes the following findings:

a. GDM held a licence under the Act as a mortgage brokerage from July 1, 2008, to October 3, 2011.

b. GDM initially applied for a brokerage under the Act in an application dated March 17, 2008. In that application, Mr. Martin, on behalf of the brokerage, ticked a box indicating that the brokerage will have the required errors and omissions insurance in place by July 1, 2008.

c. In the fall of 2008, the Superintendent conducted an E&O audit to determine whether licensed brokerages were in compliance with the requirement to have E&O coverage.

d. That audit determined that GDM did not have E&O coverage as of the date of the audit – October 15, 2008.

e. The Superintendent notified GDM through its principal broker that the audit had determined that GDM did not have E&O insurance and asked the principal broker to provide proof of coverage and indicate whether GDM had conducted any mortgage business.

f. Mr. Martin responded by email on December 1, 2008. He stated that upon receiving the Superintendent’s notice, he purchased insurance on behalf of GDM. He also stated that GDM conducted no business while uninsured. Mr. Martin also included proof of E&O coverage from November 28, 2008 until April 1, 2009.

g. The Applicant GDM did not have E&O coverage in place from July 1, 2008, to November 28, 2008, a period of just under 5 months, although it was licensed as a mortgage brokerage during that time.

h. In the fall of 2010, the Superintendent conducted a second audit to determine compliance by the mortgage brokerage.

i. That audit determined that GDM again did not have E&O coverage as of the date of the audit – October 15, 2010.

j. On December 14, 2010, the Superintendent notified GDM through its principal broker that the audit had determined that GDM did not have E&O insurance and asked the principal broker to provide proof of coverage and indicate whether GDM had conducted any mortgage business.

k. Mr. Martin responded by email on December 20, 2010. He stated that GDM did not conduct any mortgage brokering business in 2010. He also provided proof of coverage effective December 20, 2010.

l. It was later determined that the brokerage had no coverage from April 2, 2010 to and including December 19, 2010, a period of over 8 months.

m. The Superintendent issued a notice of proposal to impose administrative monetary penalties on September 13, 2011.

n. GDM applied to surrender its brokerage licence and that request to surrender was granted. The brokerage’s licence was terminated effective October 3, 2011.

o. The Financial Services Commission of Ontario (“FSCO”) produces and distributes a newsletter to licensed brokerages entitled “Mortgage Broker e-info Newsletter”. It is sent via email to every licensed principal broker in Ontario and provides updates on the implementation and requirements of the new Act and regulations. It is sent to the email address that principal brokers provide to FSCO.

p. On January 7, 2010, Newsletter Issue 16 was sent to all principal brokers informing them that the Superintendent was going to conduct an audit of mortgage brokerages to determine compliance with the errors and omissions requirement. Issue 19 dated December 22, 2010, referred to the audit that was underway and noted that FSCO would take enforcement action in response to E&O violations. In earlier newsletters (11, 12, 13 and 15) FSCO provided information and reminders to principal brokers about the requirement that brokerages have E&O coverage.

10In addition, counsel for the Superintendent introduced into evidence an affidavit sworn by Mr. Anatol Monid, the Director of the Market Regulation Branch, Licensing and Market Conduct Division, of the Financial Services Commission of Ontario (“FSCO”). A copy of this affidavit had been provided to Mr. Martin in advance of the hearing and Mr. Monid was available at the hearing for the purpose of cross-examination. Mr. Martin reviewed the six-page document and did not have any questions for the witness. For the purpose of this hearing, the Tribunal considered and accepts the following parts of Mr. Monid’s evidence:

a. The regulatory system established by the Act and regulations depends on voluntary compliance on the part of licensees. 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.

b. The E&O requirement is imposed on licensed brokerages, whether or not the brokerage actually carries on business or brokers a completed mortgage transaction. 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, there is no practical way for a regulator to know whether a brokerage is doing business within the meaning of the Act, on any given day. Accordingly, the E&O requirement attaches to the licence itself, and not to the activities of the brokerage.

c. Two audits were conducted by FSCO in order to determine compliance with the E&O requirement – one in the fall of 2008 and one in the fall of 2010. 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 with the Act. As a result, many brokerages – including GDM – obtained insurance, while others surrendered their licences. For those that did not comply, the Superintendent issued notices to impose administrative penalties. After the 2010 audit, the rate of non-compliance had dropped to 6.1%, an improvement that can be attributed 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.

d. The Superintendent has taken a progressive approach to the Act’s enforcement, adopting various measures to increase awareness and ensure compliance. These measures include newsletters, electronic mail communications, cautions, and notices to impose monetary penalties, to suspend or even to revoke a licence.

e. Following the 2010 audit, because the E&O requirement was no longer new, there was an increase in the proposed penalty to encourage compliance. For repeat offenders, the increase was even greater. Brokerages in breach a second time warrant a higher administrative monetary penalty to achieve both specific and general deterrence.

f. In 2008, the cost of E&O insurance for a mortgage brokerage was between $800 and $1,200 per year.

11The Tribunal also received evidence from Mr. Martin, the principal broker of the Applicant. He testified under oath that he is registered with the Real Estate Council of Ontario (“RECO”) and that he obtained a licence for GDM under the Act with the objective of starting a mortgage brokerage, but that he never used this licence to conduct any business because he did not secure the educational requirements necessary to become a mortgage broker. According to his testimony, he did not receive any notification from his insurance company, from his insurance broker or from FSCO that the E&O coverage of GDM was about to lapse. By way of comparison, Mr. Martin testified that he would receive notices to renew the insurance required by RECO. Quite candidly, he said that he received the newsletters introduced into evidence by counsel for the Superintendent and that he did not read them. However Mr. Martin did not deny knowledge of the requirement for E&O insurance.

12In cross-examination, Mr. Martin was again forthright. With respect to the 2008 audit, he testified that he obtained E&O coverage only because FSCO had brought the matter to his attention and that he would not have obtained insurance if FSCO had not sent the email notification. This coverage expired on April 1, 2009 and Mr. Martin testified that the policy was renewed by him until April of 2010. According to his testimony, the witness renewed the policy through an insurance broker and he did not receive any notification prior to this renewal. With respect to the 2010 audit, Mr. Martin gave the same answers: he obtained E&O coverage because FSCO had brought the matter to his attention and he would not have obtained insurance if FSCO had not sent the email notification.

E. ANALYSIS

1) The Contravention

13In light of the concessions made by Mr. Martin and the documentary evidence presented at the hearing, the Tribunal concludes that the Applicant GDM has contravened the Act within the meaning of subsection 39(1). For a period of approximately thirteen months (from July 1, 2008 until November 28, 2008 and from April 2, 2010 until December 19, 2010), the Applicant 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. Martin, as principal broker for GDM, had the statutory obligation to carry out his powers and duties in accordance with said regulation: subsection 7(6) of the Act.

2) Issue 1: The Statutory Purposes

14With respect to the first issue identified above, 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 GDM. 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 E&O premiums for a total of thirteen months. This benefit may not be substantial, but it is derived directly from the Applicant’s failure to comply with the law.

Furthermore, the imposition of a monetary penalty on the Applicant serves to remind industry participants that liability insurance is one of the most important public safeguards under the Act and, more significantly, that E&O insurance is not conditional on the level of business conducted in any given year. These points have consistently been communicated by FSCO in its newsletters and by the Tribunal in its decisions. In particular, this Tribunal has recognized in previous decisions that a penalty can also be a general deterrent element to others in the industry.

3) Issue 2: The Quantum

15In determining the amount of GDM’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 GDM’s contravention was intentional, reckless or negligent: During the hearing, Mr. Martin never claimed that he was unaware of the requirement for E&O insurance. He argued for clemency, given the fact that his brokerage did not conduct any business, but he never argued that he was unaware that the failure to have E&O insurance was a contravention of the Act. In fact, in his application for a brokerage licence, Mr. Martin ticked a box indicating that GDM would have the required liability insurance in place by July 1, 2008. In any event, whether his first contravention was negligent, reckless or intentional, there is no doubt that Mr. Martin had full knowledge of the requirement by December 1st, 2008, and that he knew it was not predicated on the amount of business conducted by GDM. He purchased E&O coverage and renewed this policy in April of 2009, without any reminder from FSCO, from his insurer or from his insurance broker. This coverage was not renewed the following year, in April of 2010, and Mr. Martin testified that the matter “would not have come to [his] mind” without the email notification from FSCO. Accordingly, the Tribunal finds that the Applicant’s second contravention was either reckless or negligent.

b. The extent of the harm or potential harm to others resulting from GDM’s contravention: There is no evidence before the Tribunal that GDM engaged in any mortgage business between November 28, 2008 and April 1, 2009, or between April 2, 2010 and December 19, 2010. Nonetheless, potential harm to the public existed by virtue of the fact that the Applicant 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 GDM was not dealing or trading in mortgages within the meaning of the Act.

c. The extent to which GDM took any remedial actions: By his own admission, the principal broker of GDM would not have secured E&O coverage but for the email notifications received from FSCO in the fall of 2008 and the fall of 2010. Likewise, he did not apply to surrender the licence of the Applicant until he received the two notices from the Superintendent, on September 13, 2011. Accordingly, there is no evidence that the Applicant took any significant steps to mitigate its failure to have E&O coverage during the thirteen months at issue.

d. The extent to which GDM derived any economic benefit from its contravention: The Applicant 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 thirteen months. The certificates of insurance contained in the Agreed Book of Documents are consistent with the testimony of Mr. Monid regarding the approximate cost of E&O insurance. Indeed, the certificates show that GDM obtained coverage from November 28, 2008 until April 1, 2009 for $246 and from December 20, 2010 to April 1, 2011 for $250. In other words, the Applicant paid approximately $500 for seven months of coverage or approximately $71 per month. On the basis of this evidence, it is reasonable to infer that GDM obtained a benefit of approximately $925 from not complying with the Act.

e. Any other contraventions by GDM during the preceding five years: Although both contraventions were combined in the Superintendent’s notice of proposal, they remain two distinct failures to comply with a requirement under the Act. On the first occasion, the Applicant may have received the benefit of the Superintendent’s progressive approach to enforcement; by securing insurance within the specified deadline, the Applicant was not the subject of any discipline following the 2008 audit. However, this does not wipe out or justify GDM’s earlier contravention. It remains an aggravating factor that must be considered by the Tribunal.

16In view of these findings, the Tribunal concludes that the appropriate monetary penalty for the Applicant’s contravention of the Act is $3,000 and sees no reason to alter the amount in the Superintendent’s notice of proposal.

F. ORDER

17The Tribunal directs the Superintendent, by order, to carry out his proposal to impose an administrative monetary penalty of $3,000 on the Applicant brokerage Glenn David Martin.