FINANCIAL SERVICES TRIBUNAL
2012 ONFST 17
Decision No. M0495-2012-1
IN THE MATTER OF the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29 (the “Act”), in particular sections 7, 14, 19, 21, 38 and 39, and related Regulations thereto;
AND IN THE MATTER OF Abiola Afolabi (“Afolabi”);
AND IN THE MATTER OF a request for hearing pursuant to subsections 21(3) and 39 (5) of the Act.
BETWEEN:
Abiola Afolabi
Applicant
-and –
SUPERINTENDENT OF FINANCIAL SERVICES
Respondent
BEFORE:
Florence Holden
Vice Chair of the Tribunal and Chair of the Panel
Heather Gavin
Member of the Tribunal and Member of the Panel
David Short
Member of the Tribunal and Member of the Panel
APPEARANCES:
Lakin Afolabi
Solicitor For the Applicant
Larissa Easson
For the Respondent
HEARD:
June 1, 2012
REASONS FOR DECISION
This is a decision upon a hearing held pursuant to s. 21(3) and s. 39 (5) of the Mortgage Brokerages, Lenders and Administrators Act, 2006 S.O. 2006 (the “Act”) at the request of Ms. Afiola Afolabi (the “Applicant” or “Afolabi”).
The Superintendent of Financial Services (“Superintendent”) issued a Notice of Proposal to Revoke Licence and Notice of Proposal to Impose Administrative Monetary Penalty dated December 28, 2011 pursuant to sections 19, 21 and 39 of the Act.
On January 19, 2012 the Applicant requested a hearing before the Financial Services Tribunal (“Tribunal”) in respect of the Superintendent’s Notices of Proposal. Shortly before the hearing, the Superintendent accepted the Applicant’s surrender of its mortgage brokerage licence, thereby limiting the issues to be considered by this Tribunal to whether or not an administrative monetary penalty should be issued against Afolabi for the failure to have errors and omissions insurance, and if so, should the amount of the penalty be $3,500?
For reasons outlined below the Tribunal upholds the Superintendent’s decision to impose a proposed administrative monetary penalty on the Applicant but orders the penalty to be in the amount of $3,500.
A. BACKGROUND AND FACTS
With the consent of both parties, the Tribunal accepted and considered an agreed statement of facts noting areas of disagreement and an agreed book of documents (“ABD”) filed with the Tribunal at the commencement of the hearing. In addition, the Tribunal considered the testimony of Ms. Abiola Afolabi, the principal broker of the Applicant who gave evidence on behalf of the Applicant, and the affidavit evidence and testimony of Mr. Anatol Monid, Director of the Market Regulation Branch, Licensing and Market Conduct Division of the Financial Services Commission of Ontario
(“FSCO”). We find as follows:
Abiola Afolabi (“Afolabi”) is a licensed mortgage brokerage under the Act. Afolabi has been licensed since June 25, 2008 and also operates under the business name of Integrity Mortgages and Project Funding. Ms. Afolabi was listed as the principal broker of Afolabi effective July 1, 2008.
The Superintendent has approved providers for providing errors and omissions (“E&O”) insurance to licensees under the Act.
The Superintendent conducted an audit of mortgage brokerages in 2008 and determined that Afolabi did not have E&O coverage for the period July 1, 2008 to December 9, 2008. After being contacted by FSCO, the Applicant subsequently obtained coverage with a start date of December 10, 2008. We find that the Applicant did not have coverage for the period July 1, 2008 to December 9, 2008, as affirmed by the Applicant’s counsel, even though the Applicant conducted mortgage business in 2008 with a value of $312,062.50. Ms. Afolabi's testimony was that she lacked the funds to pay the premium. No action was taken by the Superintendent in respect of this first breach of the Act.
During the period from 2008 to date, FSCO continually promoted the regulatory requirements within the mortgage brokerage industry, including the possibility of administrative monetary penalties for non-compliance. An example of such communications may be found in the Mortgage Broker e-Info Newsletters issued by FSCO, such as the ones dated April 1, 2009; May 25, 2009; October 13, 2009; and January 7, 2010; all of which remind brokerages and administrators of the requirement to have E&O insurance through an approved provider. The January 7, 2010 e-Info newsletter also indicated the plan for a 2010 FSCO audit. An E&O insurance requirement was also explicit on the Application for Principal Broker Renewal Licence form, such as that completed by the Applicant and signed by Ms. Afolabi on March 29, 2010, after the expiry of the Applicant’s coverage. Ms. Afolabi testified that she was aware of the need for E&O coverage in 2008 and thereafter.
The Superintendent conducted another audit of mortgage brokerages in October 2010 and found that Afolabi did not have E&O insurance coverage from one of the approved providers from July 1, 2009 to February 14, 2011. We agree with this finding.
The Superintendent requested information from Afolabi regarding the brokerage’s E&O coverage by email sent on December 14, 2010. 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. The email stated that a response was required by December 21, 2010. The notice advised that lack of coverage was subject to enforcement action including an administrative penalty and/or suspension or revocation of a licence.
Ms. Afolabi replied on behalf of the Applicant on January 7, 2011 and affirmed that coverage had lapsed for non-payment. She did not provide the Superintendent or this Tribunal with any insurance policy for the period July 1, 2009 to February 14, 2011. The Tribunal rejects her testimony that she believed that insurance coverage was in place for this period. She clearly made no payment towards premiums nor made any attempts at such payment, and further, offered no evidence of coverage or evidence that any insurer had agreed to provide coverage without payment. In fact the evidence before us was that the Applicant sought coverage as at July 1, 2009 and received invoice statements and a demand for immediate payment on July 16, 2009 from Rocca Dickson Andreis Inc. (“RDA”), but did not make the payment or receive a certificate of insurance. There was also some evidence before the Tribunal that Ms. Afolabi on behalf of the Applicant attempted to later secure insurance coverage effective April 1, 2010 from the same insurance brokerage but again failed to make payment and was in fact advised that cancellation proceedings for non-payment of the policy had commenced on July 15, 2010. We find that the letter from RDA was clear and unambiguous with respect to the lack of coverage, and it would have been impossible for Ms. Afolabi to conclude that no action was necessary on her part.
We find Ms. Afolabi's insistence that she had insurance coverage for the period in question lacks credibility in fact and in law. She clearly understood insurance was not for free and non-payment would result in cancellation or lack of coverage. The onus is on the Applicant, not the insurance industry, to secure coverage. For an application to be complete, it is reasonable to assume payment must also be made by the insured. Ms. Afolabi provided no additional documentation or evidence in regard to the relevant period from July 1, 2009 to February 14, 2011 with respect to other correspondence or conversations with insurers or insurance brokerages beyond the notice of outstanding premiums and cancellation of her application for coverage referred to above. Her memory was vague or non-existent as to contacts with insurers regarding obtaining coverage.
Ms. Afolabi’s evidence was that this second breach was unintentional and that she let it lapse while consumed with personal matters and health issues. However, this second breach was for a very long time, during which there was no evidence before us that Ms. Afolabi either secured coverage or notified the regulator of her failure to ensure the Applicant held the necessary insurance. In fact we find that she provided false information as to the Applicant’s insurance coverage both on her application for Principal Broker licence renewal of March 29 2010 and on the Annual Information Return for 2010 as to the existence of insurance coverage during 2010. It does appear based on evidence before us that the Applicant did secure coverage during the period December 10, 2008 to July 1, 2009 but let it lapse thereafter. She provided no cogent explanation for the lapse beyond financial struggles which existed by her own admission in 2008 and 2010 when she was still conducting business.
We find further that the Applicant completed at least one mortgage transaction in 2010 as evidence by the testimony of Ms. Afolabi and by the Annual Information Return filed for the period ending December 31, 2010 with a mortgage value of $66,000. However we accept the evidence of Mr. Monid that there is no practical way for a regulator to know on a day to day basis whether a brokerage is doing business of dealing and/or trading in mortgages beyond these filings until an audit is conducted. In fact, applications for licence renewals would only take place every two years.
In January and February of 2011, Ms. Afolabi continued to correspond with FSCO by email changing her position each time as to whether she would or would not obtain insurance and maintain the brokerage licence. Ultimately on February 2, 2011, Ms. Afolabi indicated that she wanted to continue being licensed and that an insurance policy was being arranged. By email on February 15, 2011, she stated that she had obtained a policy and provided a certificate for insurance with an effective date of February 14, 2011.
Ms. Afolabi submitted a request to surrender the Applicant’s brokerage license on or about June 13, 2011. On December 28, 2011, the Superintendent issued a notice of a proposal to revoke licence and to impose an administrative monetary penalty against Afolabi pursuant to section 40 of the Act. Having accepted the Applicant’s surrender of its licence on or about June 1, 2012, this Tribunal is no longer concerned with the proposal to revoke Afolabi’s brokerage licence.
In addition, the Tribunal has considered the affidavit testimony of Mr. Anatol Monid as to the general operation of the licensing system and its enforcement activities. In particular, we accept his testimony that:
The Act imposed certain requirements, including the need for E&O insurance on all licensed brokerages, and imposed standards of conduct on mortgage brokers and agents. The requirement to have E&O insurance is imposed whether or not the brokerage actually carries on business, or brokers a completed mortgage transaction.
There are no exemptions under the Act from the requirement to have E&O insurance which is the sole responsibility of the brokerage. The E&O requirement is a clear example of consumer protection, making sure that there is a fund available to members of the public who have suffered financial loss as a result of the negligence or fraud of brokerages.
The Superintendent has taken a progressive approach to enforcement, adopting various tools to increase awareness (via website newsletters and email communications to the industry); issuing cautions, licence suspensions or revocations; and administrative monetary penalties. In relation to the 2008 compliance audit, Mr. Monid’s affidavit evidence was that after the 2010 audit, there was a modest increase to penalties to encourage compliance, particularly for repeat offenders. Brokerages in breach a second time warrant a higher administrative monetary penalty to achieve both specific and general compliance.
Mr. Monid’s affidavit indicated that on average, the cost of E&O insurance in 2008 was approximately $800-1200 p.a. The evidence of related invoices indicated that the Applicant’s premiums fell around $750 p.a. in 2008-9, which we infer would be within this range.
B. STATUTORY FRAMEWORK
The Act, which came into effect July 1, 2008, 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 licences and, in subsection (4), requires any licensee to comply with such standards of practice as may be prescribed, by regulation, for its variety of licence. The Mortgage Brokerages: Standards of Practice Regulation, O. Reg. 188/08 prescribes standards of practice (section 4) for every mortgage brokerage licence that is issued under the Act, including the following:
“42. (1) A brokerage shall maintain errors and omissions insurance in a form approved by the Superintendent with extended coverage for loss resulting from fraudulent acts or shall have some other form of assurance in a form approved by the Superintendent.
(2) The insurance or other assurance must be sufficient to pay a minimum of $500,000 in respect of any one occurrence involving the brokerage or any broker or agent authorized to deal or trade in mortgages on its behalf and $1 million in respect of all occurrences during a 365-day period involving the brokerage or any such broker or agent.”
Section 2 of Ontario Regulation 410/07, Principal Brokers: Eligibility, Powers and Duties, O. Reg. 86/09, requires the principal broker of a brokerage to take “reasonable steps to ensure that the brokerage and each broker and agent authorized to deal or trade in mortgages on its behalf, complies with every requirement established under the Act” and “to deal with any contravention”. Ms. Afolabi is the principal broker and director of Afolabi and, as such, admitted knowledge of its compliance requirements. She did not deny knowledge of the requirement for E&O insurance and would have been reminded of the requirement in a number of FSCO communications and filings.
Further, subsection 1 (1)(3) of Ontario Regulation 408/07, Mortgage Brokerages Licensing, imposes a requirement for errors and omissions insurance as a condition of the issuance of a brokerage licence.
The Act provides for the imposition of administrative penalties as follows:
“38. (1) An administrative penalty may be imposed under section 39 or 40 for either of the following purposes:
To promote compliance with the requirements established under this Act.
To prevent a person or entity from deriving, directly or indirectly, any economic benefit as a result of contravening or failing to comply with a requirement established under this Act.
(2) An administrative penalty may be imposed alone or in conjunction with any other regulatory measure provided by this Act, including a compliance order or the amendment, suspension or revocation of a licence.
- (1) If the Superintendent is satisfied that a person is contravening or not complying with or has contravened or not complied with a requirement established under this Act, other than a requirement for which a penalty is provided under section 40 or a requirement prescribed under clause 55(5)(a), the Superintendent may, by order, impose an administrative penalty on the person or entity in accordance with this section and the regulations.”
Section 39 goes on to provide that the Superintendent shall give a notice of proposal to impose an administrative penalty, which may be combined with a notice of proposal authorized by any other section of the Act, and that the person on whom the penalty would be imposed may request a hearing on the proposal before this Tribunal (subsections (2) and (3)), as has happened in this case.
The Administrative Penalties Regulation, O. Reg. 192/08, in section 3 provides criteria to govern the amount of an administrative penalty as follows:
“The Superintendent shall consider only the following criteria when determining the amount of an administrative penalty to be imposed under section 39 of the Act for a purpose set out in section 38 of the Act:
The degree to which the contravention or failure was intentional, reckless or negligent.
The extent of the harm or potential harm to others resulting from the contravention or failure.
The extent to which the person or entity tried to mitigate any loss or to take any other remedial action.
The extent to which the person or entity derived or reasonably might have expected to derive, directly or indirectly, any economic benefit from the contravention or failure.
Any other contraventions or failures to comply with a requirement established under the Act or with any other financial services legislation of Ontario or of any other jurisdiction during the preceding five years by the person or entity.”
As well under Ontario Regulation 193/08, Reporting Requirements for Licensees, in section 13, there is a requirement on the brokerage to immediately notify the Superintendent if errors and omission insurance is cancelled or is not renewed.
Section 41 of the Act provides that the maximum administrative penalty that may be imposed on a person or entity that is a mortgage brokerage for a failure to comply with a requirement of the Act is $25,000 and the maximum penalty that may be imposed on an individual who is a mortgage broker is $10,000.
Upon holding a hearing on a notice of proposal under the provisions of the Act relating to a proposed imposition of an administrative penalty or the suspension or revocation of a licence, the Tribunal may direct the Superintendent to carry out the proposal, with or without changes, or substitute its opinion for that of the Superintendent (subsections 21(4) and 39(6)). However we note that there is nothing in the Act or regulations that would allow the Tribunal to simply forgive Afolabi on account of personal difficulties encountered by its principal broker.
C. ISSUES
The Tribunal considered the following issues:
Should the Superintendent impose an administrative monetary penalty upon the Applicant for failure to have E&O insurance?
If so, is the amount of $3,500 as proposed by the Superintendent appropriate?
At the hearing, Ms. Afolabi’s counsel asked that no monetary penalty be imposed or that in the alternative it be reduced to $1200. For reasons outlined below the Tribunal upholds the Superintendent’s decision to impose an administrative monetary penalty on the Applicant of $3,500.
D. DECISION
The Tribunal in other decisions has recognized that:
“The Act and requirement for E&O insurance provides the public with protection. Its requirements and the attendant duties to maintain and advise FSCO of any changes in coverage and to respond to requests by FSCO for information cannot simply be ignored without consequences. To do so would undermine public confidence in the mortgage industry and in the regulator. As indicated earlier, such penalty may be imposed under subsection 38 (1) of the Act for either of two purposes, namely to promote compliance with a requirement established under the Act and to prevent a person from deriving an economic benefit as a result of failing to comply with a requirement established under the Act. Its usefulness also can be a general deterrent element to others in the industry.”1
This order is against the Applicant, not Ms. Afolabi personally. We find that the Superintendent’s request for an administrative monetary penalty is reasonable under subsection 39(1) of the Act.
We have concluded that such penalty would serve both of the purposes outlined above. The Applicant’s economic benefits results from the premiums which would otherwise have had to be paid for the second infraction, that is the 19 ½ months that it was without coverage but the holder of a mortgage brokerage licence under the Act. We note that the applicant appears to also have earned some commission on the 2010 mortgage financing declared in its 2010 Annual Information Return, but on which no evidence was provided as to amount.
The failure to obtain E&O insurance is an offence under the Act and therefore a basis for imposing an administrative penalty upon the Applicant under both purposes of subsection 39(1) of the Act.
As to the amount of penalty, we have decided that the amount of $3,500 for failure to have E&O insurance is appropriate. In coming to this conclusion, we were mindful of the following:
The degree to which the contravention or failure was intentional, reckless or negligent. We find the failure to comply with the Act in this circumstance was both intentional and reckless. Ms. Afolabi, as principal broker was well aware of the requirements in 2008 for E&O insurance and conducted business during that period. Further, she committed a second more serious breach in 2009-2011 and chose to remain uninsured despite repeated industry reminders and a previous failure for the same offence. Consequently we find Afolabi’s conduct at the higher end of the penalty scale in these circumstances.
The extent of the harm or potential harm to others resulting from the contravention or failure. The evidence as to the amount of mortgage brokerage business conducted in 2010 seems to relate to the one transaction where commission was earned by the Applicant. In addition, potential harm would still have existed by the fact of lack of insurance while conducting business. It is possible that business was conducted which did not result in a closed deal.
The extent to which the person or entity tried to mitigate any loss or to take any other remedial action. We find that the Applicant took no reasonable action to remedy the breach in advance of being notified by the regulator, although she knew or should have known she was in breach of the Act. She did not take immediate steps to secure coverage. We accept that although she finally took the act in June of 2011 of surrendering her licence, the Superintendent at first appeared to refuse, then ultimately accepted the surrender only shortly before this hearing.
The extent to which the person or entity derived or reasonably might have expected to derive, directly or indirectly, any economic benefit from the contravention or failure. The Applicant received an economic benefit in the amount of the insurance premium for the second breach of 19 1/2 months which may be estimated to be approximately $1200 based on prior premiums.
Any other contraventions or failures to comply with a requirement established under the Act or with any other financial services legislation of Ontario or of any other jurisdiction during the preceding five years by the person or entity. We note that this is the Applicant’s second breach regarding E&O coverage: the Applicant received no penalty in the first instance nor was action taken against the principal broker Ms. Afolabi. The two cases to which Ms. Afolabi’s legal counsel referred the panel for reduced penalty, Mi Terra Realty Inc. (M0392-2009) and Douglas Wong (M0375-2009) are significantly different from this case on their facts, both being cases of first offences and not binding on the panel in this decision.
On the facts of this case and taking account of all of the above criteria, as well as cases previously decided by this Tribunal, we have decided that the administrative penalty outlined in the Superintendent’s notice of proposal in the amount of $3,500 is appropriate.
E. ORDER
We hereby direct the Superintendent, by order to impose an administrative monetary penalty upon the brokerage Abiola Afolabi in the total amount of $3,500.
Dated at Toronto, Ontario this 3rd day of July, 2012.
“Florence Holden”
Florence Holden
Vice Chair of the Tribunal and Chair of the Panel
“Heather Gavin”
Heather Gavin
Member of the Tribunal and Member of the Panel
“David Short”
David Short
Member of the Tribunal and Member of the Panel