Toronto Resale Homes Realty Ltd. v. Superintendent of Financial Services, 2012 ONFST 13

FINANCIAL SERVICES TRIBUNAL

2012 ONFST 13

Decision No. M0478-2011-1

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 August 15, 2011, to revoke the brokerage licence of Toronto Resale Homes Realty Ltd. (“Toronto Resale”) and a Notice of Proposal issued on the same day to impose an administrative monetary penalty of $3,000 on Toronto Resale;

AND IN THE MATTER OF a Request for Hearing filed by Mrs. Tanya Kvint on behalf of Toronto Resale, on September 1, 2011, pursuant to subsections 21(3) and 39(5) of the Act.

BETWEEN:

TORONTO RESALE HOMES REALTY LTD.

Applicant

• and -

SUPERINTENDENT OF FINANCIAL SERVICES

Respondent

BEFORE:

Mr. Denis Boivin

Member of the Tribunal and Chair of the Panel

APPEARANCES:

Mrs. Tanya Kvint, representing the Applicant

Mr. Stephen Scharbach, representing the Respondent

HEARD:

March 23, 2012

REASONS FOR DECISION

A. INTRODUCTION

1. This hearing was requested by Mrs. Tanya Kvint pursuant to subsections 21(3) and 39(5) of the Mortgage Brokerages, Lenders and Administrators Act, 2006 (the “Act”). Mrs. Kvint is the principal broker of a mortgage brokerage called Toronto Resale Homes Realty Ltd. (“Toronto Resale”). On August 15, 2011, the Superintendent of Financial Services (the “Superintendent”) issued two notices with respect to this brokerage: one proposing to revoke the licence of Toronto Resale and one proposing to impose an administrative monetary penalty of $3,000 on the brokerage.

2. Both proposals stem from the same allegation: the Superintendent claims that Toronto Resale twice failed to have the required errors & omissions (“E&O”) insurance. During the hearing, Mrs. Kvint conceded this point, but presented evidence of mitigating circumstances that, in her opinion, should be considered in assessing Toronto Resale’s penalty. In addition, she attempted to surrender the licence of Toronto Resale, but her application was placed on hold pending the resolution of this matter. According to the Superintendent, the Applicant’s licence must be revoked and not simply surrendered.

3. For reasons that follow, the Tribunal concludes that the monetary penalty should be reduced to $2,000 in light of the specific circumstances of this case. Furthermore, since the licence of Toronto Resale expired on March 31, 2012, the notice of proposal to revoke said licence is moot.

B. STATUTORY FRAMEWORK

4. The authority to revoke a brokerage licence, such as the one issued to Toronto Resale, is found in section 19 of the Act. Pursuant to subsection 19(1), the Superintendent has the discretion to revoke a brokerage licence in any of the circumstances in which he is authorised to suspend a licence under subsection 18(1)(a), (b), (c) or (d). These circumstances include the following: “if the licensee contravenes or fails to comply with a requirement established under [the] Act”.

5. The authority to impose an administrative monetary penalty on a licensee 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 such as Toronto Resale 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.

6. In the present case, counsel for the Superintendent relies on subsection 7(4) of the Act in order to establish the contravention that is required to revoke the licence of Toronto Resale and to impose a monetary penalty on this brokerage. 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 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.

7. 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 Toronto Resale. 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.

8. Two other provisions are relevant to this proceeding: subsections 21(4) and 39(6). According to them, when the Tribunal has held a hearing following a notice of proposal to revoke a licence or 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. In other words, hearings held pursuant to subsections 21(3) and 39(5) of the Act are de novo hearings. As stated in many other decisions, the Tribunal need not show any deference to the Superintendent’s determination with respect to whether a proper basis exists for revoking a licence or for imposing a penalty on a licensee, or with respect to the amount of any penalty that is appropriate in light of the circumstances of the case.

C. ISSUES

9. During the hearing, Mrs. Kvint conceded that her brokerage was in breach of subsection 7(4) of the Act and section 42 of Regulation 188/08 on two distinct occasions. Accordingly, this hearing raises only three questions:

a. Issue 1: Would a monetary penalty promote compliance with the Act or prevent Toronto Resale from deriving a benefit from its contravention, within the meaning of section 38 of the Act?

b. Issue 2: 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?

c. Issue 3: Is the revocation of Toronto Resale’s brokerage licence justified, having regard to the monetary penalty imposed on this brokerage?

D. EVIDENCE

10. Most of the evidence that is relevant to these three 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 of fact:

a. Toronto Resale became licensed as a mortgage brokerage on July 1, 2008. Toronto Resale initially applied for a brokerage licence under the Act in an application dated June 16, 2008. In that application, Mrs. Kvint ticked a box indicating that the brokerage would have the required E&O insurance in place by July 1, 2008.

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

c. On November 26, 2008, by electronic mail, the Superintendent notified Toronto Resale through its principal broker that the audit had determined that the brokerage did not have E&O insurance and asked Mrs. Kvint to provide proof of coverage and indicate whether Toronto Resale had conducted any mortgage business.

d. On November 27, 2008, Mrs. Kvint responded by fax. She described the absence of coverage as an “honest mistake” on her part and provided an explanation. She also stated that Toronto Resale conducted no business while uninsured and provided proof of E&O coverage from November 26, 2008 until July 1, 2009. Mrs. Kvint paid a premium of $446 for this period of coverage.

e. The Applicant Toronto Resale did not have E&O coverage in place from July 1, 2008, to November 25, 2008, a period of just under 5 months, although it was licensed as a mortgage brokerage during that time.

f. In the fall of 2010, the Superintendent conducted a second audit to determine compliance by mortgage brokerages. That audit determined that Toronto Resale again did not have E&O coverage as of the date of the audit – October 15, 2010.

g. On December 14, 2010, by electronic mail, the Superintendent notified Toronto Resale through its principal broker that the audit had determined that the brokerage did not have E&O insurance and asked Mrs. Kvint to provide proof of coverage and indicate whether Toronto Resale had conducted any mortgage business.

h. Mrs. Kvint responded by electronic mail on December 21, 2010. She explained that she had been “away for most of the year” and had missed the deadline to renew her policy. She stated that the Applicant conducted no business during the period, that she would arrange for coverage and that she would be “more diligent in the future”. On December 28, 2010, she provided proof of E&O coverage from December 21, 2010 to July 1, 2011. Mrs. Kvint paid a premium of $395 for this period of coverage.

i. The Applicant Toronto Resale did not have E&O coverage in place from July 1, 2010, to December 20, 2010, a period of just under 6 months, although it was licensed as a mortgage brokerage during that time.

j. 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.

k. 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.

11. In 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 FSCO. A copy of this affidavit had been provided to Mrs. Kvint in advance of the hearing. Although he was not present during the hearing, Mr. Monid could be reached by counsel for the Superintendent if ever Mrs. Kvint wanted to ask questions from him. However, Mrs. Kvint did not have any questions with respect to this affidavit. 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 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 Toronto Resale – 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.

12. The Tribunal also received evidence from Mrs. Kvint, the principal broker of the Applicant, Toronto Resale. She testified that she has worked as a real estate agent for over twenty years and that she opened her mortgage brokerage with the intent of combining the brokerage with her real estate business. However, according to her, this plan was spoiled due to personal hardship. First, she has a young step-daughter living in the United States who has been experiencing problems that require her to travel to the US and take care of her for 2-3 months at a time. Second, her grandson died in a tragic accident approximately four years ago and her 43-year-old son (the father) has been very depressed since the tragedy. Mrs. Kvint described herself as being “emotionally drained” as a result of these misfortunes.

13. With respect to the 2008 absence of E&O insurance, Mrs. Kvint testified that it was an honest and unintentional mistake on her part. She had applied for insurance on June 27, 2008, and had given her credit card number in order to complete the transaction, but was not informed by her broker or insurer that this form of payment was not accepted. She became aware of this problem five months later, when she received the electronic mail notification from FSCO regarding the results of the 2008 audit. With respect to the 2010 absence of E&O insurance, Mrs. Kvint testified that she was in the United States taking care of her step-daughter in the summer of 2010, at the time when the Applicant’s coverage should have been renewed. According to her, she tried to pay by credit card, but this form of payment was declined.

14. In cross-examination, Mrs. Kvint admitted that she received electronic mail notifications in July of 2009 and July of 2010 regarding the lapse of Toronto Resale’s E&O coverage. She renewed the policy in July of 2009 with a cheque. In addition, Mrs. Kvint testified that she communicated with FSCO regarding her intent to surrender the licence of Toronto Resale before receiving the notices issued by the Superintendent on August 15, 2011, and sent by registered mail on the 17th. The documents presented in evidence show that she requested information from FSCO in an electronic message dated August 19, 2011, and completed an application to surrender the licence on August 21st. According to Mrs. Kvint, she had not yet received the Superintendent’s letter at that time. In fact, she testified that the decision to surrender the licence was made in July of 2011, when she returned from the United States and noticed the invoice for the E&O premium.

E. ANALYSIS

1) The Contravention

15. In light of the concessions made by Mrs. Kvint and the documentary evidence presented at the hearing, the Tribunal finds that Toronto Resale has contravened the Act within the meaning of subsection 39(1). For a period of approximately eleven months (from July 1, 2008 until November 25, 2008 and from July 1, 2010 until December 20, 2010), this 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. E&O insurance is a standard prescribed by section 42 of Ontario Regulation 188/08 and Mrs. Kvint, as principal broker for Toronto Resale, had the statutory obligation to carry out her powers and duties in accordance with said regulation: subsection 7(6) of the Act.

16. As discussed below, the mitigating circumstances presented by Mrs. Kvint are relevant with respect to the amount of the penalty that is warranted in this case. However, the hardships that she has encountered over the past four years do not excuse or justify this contravention. Indeed, there is nothing in the Act or regulations that would allow the Tribunal to simply forgive Toronto Resale on account of personal difficulties encountered by its principal broker.

2) Issue 1: The Statutory Purposes

17. With 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 Toronto Resale. 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 eleven months. This benefit may not be substantial, but it is derived directly from Toronto Resale’s failure to comply with the law.

18. In addition, the imposition of a monetary penalty on Toronto Resale 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

19. In determining the amount of Toronto Resale’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 Toronto Resale’s contravention was intentional, reckless or negligent: From the beginning, Mrs. Kvint knew that E&O insurance was mandatory. In the licence application dated June 16, 2008, she indicated that coverage would be in place by July 1st, and she actually applied for coverage on June 27, 2008. Her application for insurance was not processed and the Tribunal accepts her evidence regarding her lack of knowledge of this fact. However, as principal broker of Toronto Resale, she should have taken steps to inform herself in this regard prior to receiving FSCO’s notification of November 26, 2008. The standard of practice prescribed by section 42 of Ontario Regulation 188/08 is to maintain E&O insurance, not simply to apply for coverage. Likewise, even though the Tribunal accepts her testimony that she was in the United States in July of 2010, and could not pay her renewal premium by credit card, she should have taken steps prior to her departure or upon her return to renew the policy of Toronto Resale, something she had managed to do in the summer of 2009. Thus, but for the hardship that Mrs. Kvint has encountered over the past four years, the Tribunal would not hesitate to conclude that the contravention of Toronto Resale was negligent, if not reckless. However, in light of the emotional state of Mrs. Kvint during this timeframe, even the former adjective seems harsh. Section 3 of Ontario Regulation 192/08 allows the Tribunal to take into account the “degree” of one’s negligence. Given the circumstances, the Tribunal concludes that the negligence of Toronto Resale in not securing E&O insurance is at the lowest end of the scale of blameworthiness envisioned by section 3.

b. The extent of the harm or potential harm to others resulting from Toronto Resale’s contravention: There is no evidence before the Tribunal that Toronto Resale engaged in any mortgage business between July 1, 2008 and November 25, 2008, or between July 1, 2010 and December 20, 2010. Nonetheless, potential harm to the public existed by virtue of the fact that Toronto Resale 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 Toronto Resale was not dealing or trading in mortgages within the meaning of the Act.

c. The extent to which Toronto Resale took any remedial actions: According to the documentary evidence, Mrs. Kvint responded quickly once notified by FSCO in November 2008 and December 2010. On both occasions, she answered all questions within the deadline and immediately took measures to secure E&O insurance. To be sure, the Applicant was in contravention of the Act for a total of eleven months and took no mitigating steps during this specific timeframe. However, her complete cooperation with FSCO, on both occasions, cannot be ignored in assessing Toronto Resale’s administrative monetary penalty.

d. The extent to which Toronto Resale 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 eleven 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 Toronto Resale obtained coverage from November 26, 2008 until July 1, 2009 for $446 and from December 21, 2010 to July 1, 2011 for $395. In other words, the Applicant paid $946 for approximately thirteen months of coverage or $73 per month. On the basis of this evidence, it is reasonable to infer that Toronto Resale obtained a benefit of approximately $800 from not complying with the Act.

e. Any other contraventions by Toronto Resale during the preceding five years: Although both contraventions were combined in the notices issued by the Superintendent, they remain two distinct failures to comply with a requirement under the Act. On the first occasion, Toronto Resale was not the subject of any discipline because E&O coverage was secured within the specified deadline. However, the enforcement approach taken by the Superintendent following the first breach does not eliminate from consideration this prior contravention. It remains an aggravating factor that must be considered by the Tribunal.

20. In view of these findings, the Tribunal concludes that the appropriate monetary penalty for the Applicant’s contravention of the Act is $2,000.

4) Issue 3: The Revocation

21. Although Mrs. Kvint applied to surrender the brokerage licence of Toronto Resale on August 21, 2011, her application was never processed. In his closing submissions, Mr. Scharbach argued that the mandate of the Superintendent to protect the public interest and enhance public confidence in the mortgage industry was better served, in this case, by revoking the Applicant’s licence than by accepting Mrs. Kvint’s application. Because the Applicant failed to comply with the most basic and important requirement of the Act on two occasions, argued Mr. Scharbach, it is important to send a “loud message” to the public by revoking its licence.

22. As a matter of principle, the position expressed by counsel for the Superintendent is sound, even though this approach is not consistently applied. Other brokerages have been allowed to surrender their licences after two contraventions of the same requirement: see Glenn David Martin v. Superintendent of Financial Services (FST Decision No. M0486-2011-1). In any event, the licence of Toronto Resale expired one week after the hearing in this matter, on March 31, 2012. Accordingly, even if the Tribunal accepts the principle put forward by counsel for the Superintendent, the revocation issue is entirely moot.

F. ORDER

23. The Tribunal directs the Superintendent, by order, to carry out his proposal to impose an administrative monetary penalty on the Applicant Toronto Resale, but with a change in the amount of the penalty from $3,000 to $2,000.

DATED at the City of Toronto, this 31st day of May, 2012.

“Denis Boivin”

Denis Boivin

Member of the Tribunal and Chair of the Panel