THE FINANCIAL SERVICES TRIBUNAL
2012 ONFST 20
Decision No. M0475-2011-1
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;
AND IN THE MATTER OF a Notice of Proposal from the Superintendent of Financial Services to impose an administrative monetary penalty of $2,500 on Michael Wan, dated August 10, 2011;
AND IN THE MATTER OF a Request for Hearing filed by Michael Wan on August 24, 2011, pursuant to subsection 39(5) of the Act.
BETWEEN:
Michael Wan
Applicant
-and-
Superintendent of Financial Services
Respondent
BEFORE:
Mr. David Short Member of the Tribunal and Chair of the Panel
Mr. Jeffrey Richardson Member of the Tribunal and Member of the Panel
Mr. John Solursh Chair of the Tribunal and Member of the Panel
APPEARANCES:
Mr. Michael Wan, representing the Applicant (“Wan”)
Mr. Joe Nemet, representing the Respondent
HEARD:
June 29, 2012
REASONS FOR DECISION
This is a decision in relation to a hearing held pursuant to a Request for Hearing filed by Wan, pursuant to s. 39(5) of the Act, following a Notice of Proposal (“NOP”), dated August 10, 2011, issued by the Superintendent. The NOP proposes to impose an administrative penalty upon Wan of $2,500, for failure to maintain required Errors and Omissions (“E&O”) insurance while holding a mortgage brokerage licence. Such insurance is required by s. 7(4) of the Act, supplemented by s. 42 of the Mortgage Brokerages: Standards of Practice Regulation, O. Reg. 188/08. Wan admits that it did not have such insurance during the period in question.
It was agreed by the parties in a pre-hearing conference held on January 31, 2012 that the only issue before the Tribunal is as follows:
“Whether the amount of the administrative monetary penalty of $2,500 proposed by the Superintendant should be reduced and, if so, to what lesser amount?”
Background and Relevant Facts
Mr. Anatol Monid, Director of the Market Regulation Branch of the Financial Services Commission of Ontario (“FSCO”) was called as a witness by the Superintendent. Mr. Monid gave evidence about the licensing system for mortgage brokerages generally and about the requirements for E&O insurance and the activities of FSCO with respect to monitoring compliance with licensing requirements.
In particular Mr. Monid testified that:
He was responsible for an audit of compliance with the E&O insurance requirements conducted in the fall of 2010. An earlier audit of compliance had been conducted in the fall of 2008.
FSCO had provided extensive communications to licenced brokerages regarding the requirements for E&O insurance and regarding FSCO’s audits of compliance with those requirements.
In the course of the 2008 audit, information obtained from the approved providers of E&O insurance indicated that approximately 30% of licenced mortgage brokerages did not have the required insurance. FSCO took action against 93 non-compliant brokerages, normally proposing an administrative monetary penalty of $1,000. FSCO took a progressive approach in determining the amount of penalties and felt that penalties in the amount of $1,000 were appropriate in 2008, in light of the newness of the requirement at that time.
The 2010 audit indicated that the level of non-compliance with the E&O insurance requirement had fallen from about 30% to about 6% - a significant improvement but still in FSCO’s view too high a level of non-compliance.
Based upon its progressive approach in determining the amounts of proposed penalties, FSCO determined that the basic penalty for non-compliance disclosed in the 2010 audit should be $1,500 for a first offence, recognizing that the requirements had then been in place for a longer period of time than at the time of the 2008 audit and that brokerages should have been more aware of them. Higher amounts of penalty would be sought for longer periods of time without insurance, or where the public had been put at risk.
It is FSCO’s view that the amount of penalty should not be only the amount of E&O insurance premium which would have been required for the period of non-compliance, in order to provide a financial incentive for compliance. He noted that E&O insurance premiums were initially in the range of $800 to $1,200 per annum, but are now higher.
In connection with the 2008 audit, administrative monetary penalties were imposed on only about 25% of the non-compliant brokerages, representing the more egregious cases. Penalties were typically not sought against brokerages which promptly obtained coverage or surrendered their licence following a notification of non-compliance. This reflected the discretion granted to the Superintendent, and FSCO’s view that education was a greater priority than enforcement at the time of the 2008 audit.
FSCO viewed cases where the 2010 audit disclosed a second period of non-compliance with the E&O insurance requirement as more serious than first offences, typically proposing a penalty of $3,000 and revocation of the mortgage brokerage licence, regardless of the brokerage’s motivation for non-compliance.
Mr. Steve Yamamoto, a Senior Compliance Officer for FSCO, was also called as a witness by the Superintendent. Mr. Yamamoto gave further evidence about the compliance audits and the circumstances of Wan’s non-compliance. In particular he testified as follows:
He was familiar with both the 2008 and 2010 audits and, together with another compliance officer, had responsibility for implementation of the 2010 audit.
In the 2010 audit FSCO obtained from the E&O insurance providers approved by the Superintendent the identities of brokerages having the required coverage. FSCO then contacted the principal brokers of those brokerages which did not have such coverage.
In an e-mail dated December 14, 2010 FSCO informed Michael Wan, as Principal Broker for Wan, that Wan appeared on FSCO’s list of brokerages without E&O insurance. The email asked that Mr. Wan advise FSCO if the brokerage did in fact have E&O insurance and also asked him to advise FSCO whether the brokerage had conducted any mortgage brokerage business in 2010.
In an e-mail response dated December 21, 2010 Mr. Wan advised FSCO that Wan had obtained insurance coverage issued by Encon Insurance Managers Incorporated (“Encon”) on July 1, 2008 which expired on June 30, 2009. The e-mail stated that before the expiry date his office had relocated and his office administrator had notified the insurance brokerage (Rocca Dickson Andreis Inc.) by fax of the change of address, but that the notice was not received by them. Consequently his office did not receive the renewal notice for the E&O insurance. This email also reported on three mortgage transactions completed by Wan while the brokerage was non-compliant. Finally the email informed FSCO that Wan had, since the notification, obtained E&O insurance through Encon (this coverage became effective December 15, 2010).
In subsequent e-mails FSCO asked Wan to provide certificates confirming all prior periods of coverage. Mr. Wan stated that he was unable to locate the certificate confirming the initial period of coverage, although he did provide copies of e-mails exchanged with the insurance brokerage referring to such coverage. (We note that the Superintendent does not dispute Wan’s assertion that it did have coverage from July 1, 2008 to June 30, 2009).
Ms. ES, Office Administrator for Wan from March 2009 to December 2010 was called as a witness by the Applicant. She provided the following evidence:
She was responsible for office administration, including the processing of accounts receivable and payable, during her period of employment by Wan. She was trained in her duties by Michael Wan.
In May 2009, around the time of the office relocation, she was instructed to advise all contacts of the office regarding the change of address. In particular she was aware of some insurance coverage through Lloyds of London.
In December 2010 she was made aware of FSCO’s notification of non-compliance with the requirement for E&O insurance coverage for the mortgage brokerage. She then found out that the insurance coverage through Lloyds of London was for Mr. Wan’s real estate business.
Her training by Mr. Wan included information of requirements for E&O insurance, among many other things. However she had no familiarity with the Mortgage Brokerages, Lenders and Administrators Act, 2006 and had no knowledge of the list of approved providers of E&O insurance for mortgage brokerages.
Each year Mr. Wan had several absences from the office, typically for 7 to 10 days, but he did communicate regularly during his absences.
The office did not take advantage of Canada Post’s mail forwarding service in connection with the 2009 office move.
The office did not have a formal system for follow-ups of such matters as renewals of insurance policies.
Statutory Framework
The Superintendent is authorized to issue mortgage brokerage licences under the terms of the Act which came into effect July 1, 2008. Mortgage brokerages are required by the Act and the regulations to have errors and omissions insurance in a form approved by the Superintendent and with a minimum level of coverage.
The Mortgage Brokerages: Standards of Practice Regulation, O. Reg. 188/08 prescribes standards of practice 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.
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.
39.(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 which 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, 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.
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)).
Decision
There is no significant dispute as to the facts in this case. Both the Applicant and the Superintendent agree that the Applicant was in contravention of the requirement to maintain E&O insurance for the period from July 1, 2009 to December 15, 2010.
The Superintendent is seeking the imposition of an administrative penalty in the amount of $2,500. This consists of the minimum penalty of $1,500 sought by the Superintendent for first offences of non-compliance identified in the 2010 audit, plus a further $500 in recognition of the long period of non-compliance (which the Superintendent noted exceeds the typical policy period for E&O insurance) plus an additional $500 in recognition of the fact that the Applicant did conduct mortgage business during the period of non-compliance, thus increasing the potential risk to the public.
The Applicant argued that the proposed amount of penalty was excessive, in light of the fact that this was his first contravention of the Act and was entirely unintentional. He requested that the penalty be reduced to $1,062, which he stated represents the cost of E&O insurance for the period of non-compliance.
The imposition of an administrative monetary penalty serves the two required purposes of promoting compliance with the requirements established under the Act, and the prevention of a person or entity from deriving an economic benefit as a result of contravening or failing to comply with the Act.
In the Millennium Mortgage Corporation decision (FST Decision No. M0365-2009-1) the panel stated:
“An administrative penalty may be imposed pursuant to the Act for either of two purposes, namely to promote compliance with a requirement established under the Act and to prevent a person form deriving an economic benefit as a result of failing to comply with a requirement established under the Act. In our view, the promotion-of-compliance purpose relates not just to compliance by the person to whom the order is directed but to compliance by others in the regulated mortgage brokering industry. In other words, there can be a general deterrent element to a penalty; a penalty can be imposed to send a message, as it were, to others who are in a similar position to the person against whom the order is directed or to other industry participants generally.”
The Tribunal has concluded that the imposition of a monetary penalty in this case is appropriate and will serve as a deterrent to others.
In determining the appropriate amount of the penalty the Tribunal must take into account the five criteria set out in section 3 of the Administrative Penalties Regulation.
The first criterion is the degree to which the failure to comply with a requirement of the Act was intentional, reckless or negligent. The Applicant was negligent in failing to maintain E&O insurance.
The second criterion is the harm or potential harm to others resulting from the Applicant’s failure to obtain E&O insurance. In our view there was some potential harm as the Applicant did conduct mortgage brokerage business during the period of non-compliance.
The third criterion is the extent to which the person tried to mitigate any loss or take any other remedial action. While the Applicant immediately placed the insurance after receiving notice from FSCO on December 14, 2010, the Applicant should have been aware that his initial coverage expired on June 30, 2009 and should have taken steps to maintain E&O insurance coverage prior to the notification by FSCO.
The fourth criterion is the extent to which the person derived or reasonably might have expected to derive any economic benefit from the failure to comply with a requirement of the Act. The Applicant received an economic benefit in the amount of the insurance premium for the period of about 17.5 months that he was without coverage but the holder of a licence under the Act.
The fifth criterion is 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. There was no suggestion that there was any other contravention or failure in this case.
Taking account of the five criteria, we are of the opinion that the administrative monetary penalty stated in the Superintendent’s Notice of Proposal in the amount of $2,500 is appropriate. We share the Superintendant’s view that a penalty in an amount equal to the cost of E&O insurance for the period of non-compliance would not serve as an adequate deterrent to non-compliance by this specific brokerage and by the mortgage brokerage industry in general, and would result in an increased risk of harm to the public.
Order
We hereby direct the Superintendent, by order, to carry out his proposal to impose an administrative monetary penalty upon the Applicant in the amount of $2,500.
Dated at Toronto, Ontario this 24th day of July, 2012.
“David Short”
David Short Member of the Tribunal and Chair of the Panel
“Jeffrey Richardson”
Jeffrey Richardson Member of the Tribunal and Member of the Panel
“John Solursh”
John Solursh Chair of the Tribunal and Member of the Panel