6874843 Canada Ltd. (Panamerican Mortgages) v. Superintendent of Financial Services, 2012 ONFST 23

FINANCIAL SERVICES TRIBUNAL

2012 ONFST 23

Decision No. M0492-2011-1

Date: 2012/09/10

IN THE MATTER OF the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29 (the “Act”), in particular sections 7-10, 14, 19, 21, 38 and 39, and the following Regulations under the Act;

AND IN THE MATTER OF 6874843 Canada Ltd., operating as Panamerican Mortgages;

AND IN THE MATTER OF a request for hearing pursuant to subsections 21(3) and 39(5) of the Act.

BETWEEN:

6874843 Canada Ltd., operating as PanamericaN Mortgages

Applicant

• and -

SUPERINTENDENT OF FINANCIAL SERVICES

Respondent

BEFORE:

Anne Corbett Vice Chair of the Tribunal and Chair of the Panel

Jennifer Brown Member of the Tribunal and Member of the Panel

Patrick Longhurst Member of the Tribunal and Member of the Panel

APPEARANCES:

Ms. Bimal Niles and Mr. Terry Niles for the Applicant

Mr. Stephen Scharbach, representing the Superintendent of Financial Services

HEARD:

July 20, 2012

REASONS FOR DECISION

This is a decision upon a hearing held pursuant to s. 21(3) and 39(5) of the Mortgage Brokerages, Lenders and Administrators Act, 2006 S.O. 2006 (the “Act”) at the request of 6874843 Canada Ltd., operating as Panamerican Mortgages (the "Applicant").

On October 31, 2011, the Superintendent of Financial Services (the "Superintendent") issued Notices of Proposal to revoke the mortgage brokerage licence issued to the Applicant and to impose an administrative monetary penalty of $3,000 against the Applicant for failing to have errors and omission insurance (“E&O insurance”) on two occasions as required by the Act.

A. Background and Relevant Facts

Both the Applicant and the Superintendent submitted an Agreed Statement of Facts containing the following agreed facts:

1. The Applicant has held a licence under the Act as a mortgage brokerage continuously since July 1, 2008. [We note that the Applicant submitted evidence during the hearing that the Applicant submitted documentation to surrender the licence as of April 1, 2010.]

2. The brokerage initially applied for a brokerage licence by way of an application dated May 5, 2008. In that application, the Applicant indicated that it will have the required errors and omissions insurance in place by July 1, 2008.

3. 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. The audit determined that the Applicant did not have E&O coverage as of the date of the audit, October 15, 2008.

4. By e-mail on November 26, 2008 and by registered letter dated December 12, 2008, the Superintendent notified the brokerage that the audit had determined that it was without E&O insurance and asked it to provide proof of coverage and indicate whether it had conducted any mortgage business.

5. The brokerage did not respond to those communications and on February 17, 2009 the Superintendent issued a notice of proposal to revoke the brokerage licence and impose an administrative penalty of $1,000.

6. The brokerage obtained E&O insurance effective February 25, 2009 and requested a hearing before the Tribunal.

7. The Tribunal held a hearing and issued a decision dated October 30, 2009. In its decision the Tribunal found that the brokerage did not have E&O coverage as required by the Act from July 1, 2008 until February 25, 2009, a period of almost 8 months, and accordingly directed the Superintendent to impose an administrative penalty of $1,000.

8. On November 3, 2009, the Superintendent issued an order imposing a $1,000 administrative penalty on the brokerage and the penalty was paid.

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

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

11. On December 14, 2010, the Superintendent notified the brokerage by e-mail that the audit had determined that it did not have E&O insurance and asked it to provide proof of coverage and indicate whether it had conducted any mortgage business.

12. The brokerage provided proof that it obtained coverage effective February 8, 2011.

13. It was later determined that the brokerage had no coverage from April 2, 2010 to February 7, 2011, a period of over 11 months. [The Tribunal notes that this is actually a period of just over 10 months.]

Additional evidence was put before the Tribunal through the affidavit of Mr. Anatol Monid, the Director of Market Regulation in the Licensing and Market Conduct Division of the Financial Services Commission of Ontario (“FSCO”).

In particular, Mr. Monid, in his affidavit states that:

1. The system of regulation created by the Act and the regulations made under it is designed to ensure that the public receives ethical, competent, and knowledgeable services from those licenced under the Act to carry on the business of dealing, trading or administering mortgages in Ontario.

2. The Act's regime depends on voluntary compliance.

3. Under the Act and Regulations, once licenced, brokerages must comply with ongoing requirements including minimum standards of practice, for example, requirements relating to the provision of accurate licencing information to the public, advertising, disclosure of the details of particular transactions, maintaining records, and managing trust funds and maintenance of errors and omissions coverage.

4. These requirements are designed to protect the public - and of those requirements, the one that most clearly and directly protects the public is the requirement that brokerages maintain errors and omissions coverage.

5. The requirement that all licenced brokerages have E&O insurance coverage was not contained in the previous legislation governing mortgage brokers (Mortgage Brokers Act).

6. The failure of a brokerage to maintain E&O insurance clearly puts the public at risk of harm. Without E&O insurance there can be no assurance that funds will be potentially available to compensate for borrowers, lenders or investor losses.

7. The requirement to have E&O insurance is a requirement imposed on licenced brokerages whether or not the brokerage actually carries on business, or brokers a completed mortgage transaction.

8. Because the contraventions revealed during the 2008 audit were processed during the initial stage of administering the new E&O insurance requirement, the Superintendent generally proposed a minimal penalty of $1,000 for simple lack of E&O insurance coverage.

9. In the case of brokerages found to be in contravention of the E&O insurance requirement for a second time (but were now in compliance), the Superintendent generally proposed a penalty of $3,000.

10. Brokerages that have been found to be non-compliant with the E&O insurance requirement for a second time suggest an inability or unwillingness to be governed under the regulatory system and warrant a higher administrative monetary penalty to achieve both specific and general compliance.

11. Apart from enforcement action that may be taken against a brokerage directly in response to a breach of a legislative requirement, a brokerage that repeatedly breaches the Act or regulations demonstrates ungovernability. Ungovernability justifies revocation of the licence.

12. Revocation of the licence sends a strong message to the industry and the public that the E&O insurance requirement is taken very seriously. In contrast, a licence surrender is a voluntary exit from the industry and is not perceived as a consequence for failure to meet a legislative requirement.

Both Mr. Niles and Ms. Niles provided evidence to the Tribunal. Mr. and Ms. Niles are husband and wife. Ms. Niles has a broker's licence and is the principal broker. Mr. Niles took care of all of the regulatory filings on behalf of the Applicant.

Both Mr. and Ms. Niles testified that documentation was sent to FSCO to surrender the Applicant's licence. A copy of the document entitled "Surrender of Mortgage Brokerage Licence" completed by Ms. Niles as principal broker, dated April 1, 2010 was produced on behalf of the Applicant.

Ms. Niles acknowledged that they did not receive any response to the request to surrender the mortgage brokerage licence but that she believed that they had surrendered the licence and this was the reason for not purchasing additional insurance when the insurance expired on April 1, 2010.

In his cross examination, Mr. Niles acknowledged that he completed on behalf of the Applicant the annual information forms for calendar year 2010 and for calendar year 2011, which forms were filed March 31, 2011 and March 30, 2012 respectively. He also testified that the licence was not renewed on April 1, 2012 and that the Applicant did not currently have a licence.

Ms. Niles explained that upon hearing from FSCO that the Applicant did not have insurance for the second time, steps were taken to renew E&O insurance to avoid another fine. Ms. Niles confirmed that she did not advise FSCO that she believed the licence was surrendered. She stated that when they got the call asking about insurance, they concluded the licence must not have been surrendered and they purchased the insurance to avoid the fine and because they thought they may want to conduct business under the brokerage licence.

In her testimony, Ms. Niles confirmed that her principal broker's licence was not renewed when it expired on March 31, 2012 and that the brokerage licence of the Applicant was also not renewed as of April 1, 2012.

Ms. Niles confirmed that the Applicant has never conducted any business as a mortgage brokerage.

The Tribunal heard contradictory evidence from Ms. Niles and from Mr. Bradley McKay, a senior compliance auditor with the FSCO. In particular, Mr. McKay testified that he spoke directly to Ms. Niles in February 2011 and sent her a copy of the e-mail that had been sent in December to all brokerages that were identified as not having insurance as a result of the E&O audit. He testified that on February 7th he told her that the E&O insurance was lapsed and subsequent to that conversation the certificate of insurance for the Applicant was filed with FSCO. Mr. McKay's evidence was that during that conversation there was no indication that Ms. Niles was of the view that insurance was not required given that the Applicant did not have a licence.

Ms. Niles evidence was that her husband was responsible for all communication and would have been the one to take this phone call. She had no recollection of any conversation with anyone at FSCO with respect to lapsed insurance. It is not disputed that the Applicant was made aware in February of 2011 that it was without E&O insurance and such insurance was immediately obtained.

The Tribunal also heard evidence from Ms. Annette Morris, a senior corporate licensing representative with FSCO. Her responsibilities are for licensing and for surrender of licences. She outlined the process followed when a request to surrender a licence is received. Requests to surrender a brokerage licence are reviewed by the Executive Director, Mr. Grant Swanson and if approved, a note is entered on the system indicating the date the surrender is approved. A letter is then sent by hard copy to the principal broker to confirm the surrender.

Ms. Morris testified that a brokerage licence is a continuous licence and remains in place until the principal broker asks for a surrender. Accordingly, the Applicant continues to hold a licence notwithstanding the view of both Mr. and Ms. Niles that the application was not renewed on April 1, 2012 and that the Applicant was not at the present time the holder of a brokerage licence. Ms. Morris confirmed that Ms. Niles' principal broker licence was not renewed in 2012 however it was renewed in 2010. Principal broker licences are issued for two years.

It was the testimony of Ms. Morris that the form entitled "Surrender of Mortgage Brokerage Licence" which was produced by Mr. and Ms. Niles during the hearing is indeed the correct form however the confirmation of transmission attached to the form indicates a fax number that in fact belongs to the 17th floor at FSCO and is not the fax number for her area. She confirmed that she had reviewed the physical file and there was no record of this form being received.

B. 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 revocation of a licence by the Superintendent in any of the circumstances where the Superintendent may suspend a licence. The relevant provisions of the Act are sub-sections 18 (1) and 19 (1) as follows:

18. (1) The Superintendent may, by order, suspend a licence,

(a) if the licensee ceases to satisfy the prescribed requirements for issuance or renewal, as the case may be, of the licence;

(b) if the Superintendent believes, on reasonable grounds, that the licensee is no longer suitable to be licensed having regard to the circumstances, if any, prescribed for the purposes of subsection 14 (1) or 16 (4), as the case may be, and such other matters as the Superintendent considers appropriate;

(c) if the licensee contravenes or fails to comply with a requirement established under this Act; or

(d) in such other circumstances as may be prescribed.

19. (1) The Superintendent may, by order, revoke a licence in any of the circumstances in which he or she is authorized by clause 18 (1) (a), (b), (c) or (d) to suspend the 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:

1. To promote compliance with the requirements established under this Act.

2. 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:

1. The degree to which the contravention or failure was intentional, reckless or negligent.

2. The extent of the harm or potential harm to others resulting from the contravention or failure.

3. The extent to which the person or entity tried to mitigate any loss or to take any other remedial action.

4. 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.

5. 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)).

C. Issues

The issues to be determined in this case are:

1. Whether the brokerage licence of the Applicant should be revoked for failure to have E&O insurance on two occasions as required by the Act?

2. Whether an administrative monetary penalty be imposed for a failure to have E&O insurance and, if so, should the amount of that penalty be $3,000.00 as proposed by the Superintendent or some other amount?

D. Decision

The Superintendent is seeking the imposition of an administrative penalty in the amount of $3,000 and a revocation of the Applicant's licence on the basis that the Applicant was in contravention of the requirement to maintain E&O insurance on two occasions, firstly, for a period of almost 8 months in 2008-2009 and the second time for a period of over 10 months in 2010-2011.

The Superintendent acknowledges that the appropriate document to surrender the Applicant's licence was faxed to a fax number belonging to FSCO but not to the number where it would have been received by the person responsible for processing the request. It is the position of the Superintendent that, while it is clear that an application to surrender the licence was made, it was reckless for the Applicant not to follow up to determine whether or not the licence had indeed been surrendered and that the behaviour subsequent to the date of surrender was consistent with continuing to hold a licence. In this regard the Superintendent noted that the annual information form had been filed for December 31, 2010 and December 31, 2011 as if a licence had been held continuously for those periods and the principal broker had renewed her licence on April 1, 2010 at the same time that the brokerage licence was submitted for surrender. The Superintendent argues that the Applicant should have assumed that it continued to be licensed.

The Superintendent argues that while Mr. and Ms. Niles may have held a sincere belief that the licence had been surrendered, that was a mistaken and reckless belief as the Applicant is expected to know the law and therefore to know that without a confirmation of a licence surrender, the Applicant continued to be licensed. The Superintendent could not direct the Tribunal to any statutory authority to support the assertion that confirmation of a surrender of licence is a requirement of the Act.

The Applicant asks that the Tribunal not revoke the licence and not impose a monetary fine. The Applicant submits that the documentation to surrender the licence was sent to a number at FSCO, and the Applicant, having surrendered the licence was not required to have insurance. Despite initially taking the position that the Applicant was not currently licensed, on the basis that the licence had not been renewed on April 1, 2012, the Applicant, having learned during the course of the hearing that it continues to be licensed, requests that the licence not be revoked.

We will deal first with the imposition of the administrative monetary penalty. 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 Applicant has acknowledged that it was in contravention of the Act by failing to have insurance. The Tribunal has concluded that an administrative monetary penalty is appropriate to promote ongoing compliance by the Applicant with the Act.

The maximum penalty under the Act is $25,000. The Superintendent is proposing a penalty of $3,000.

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.

1. The first criterion is the degree to which the failure to comply with a requirement of the Act was intentional, reckless or negligent.

This is the second time the Applicant has failed to have insurance as required by the Act.

In its reasons in respect of a hearing held in connection with the Applicant's failure to have insurance for the first time, the Tribunal found that the actions of the Applicant's principal broker Ms. Niles were unintentional and motivated by a mistaken belief that E&O insurance would not be required while the Applicant was not conducting any mortgage business and while it had RECO insurance. However the Tribunal noted that "nonetheless, issuance of a licence under the Act carries with it the obligation to understand and comply with all regulatory requirements. The Company [Applicant] was negligent in this regard".

With respect to the second failure to have insurance, both Mr. and Ms. Niles were genuinely of the view that they had done what they needed to do to surrender the licence. The form they completed is a standard form issued by FSCO. It does not indicate that any confirmation from, or acceptance by, FSCO is required to complete the surrender of the licence. It is entitled a "Surrender of Mortgage Brokerage Licence" with a subtitle "Declaration". It does contain language stating that the declaration is in support of a "request to surrender" however nothing on the face of the form makes it obvious that the request to surrender must be accepted to be effective. There is no dispute that the form was sent by fax to a fax number that belonged to FSCO. The Tribunal accepts the evidence of Ms. Morris that the fax was not received in the area of FSCO where it needed to be received in order to be acted upon.

The Superintendent relies on the fact that filings were made on behalf of the Applicant in response to documents received from FSCO without any inquiry as to whether or not such filings were required when a licence was surrendered. The Superintendent argues that this behaviour is inconsistent with the belief that the licence has been surrendered. The Tribunal however notes that the filings were made after the Applicant was contacted by FSCO and advised that it was without insurance. The annual information form was filed March 31, 2011 in respect of the 2010 calendar year and then again in March 2012 in respect of the 2011 fiscal year. The Applicant was contacted by FSCO in February 2011 with respect to the lapsed insurance. Accordingly, when the filings were made the Applicant was aware that the licence had not been successfully surrendered. The Tribunal cannot conclude that the filing of the annual information forms has any bearing on whether or not the Applicant believed the licence had been surrendered.

It is our view that it was reasonable for Mr. and Ms. Niles to assume that, upon filing the form to surrender the licence, the Applicant ceased to have a licence and that insurance was not required. It is of concern that the attempt to surrender the licence was raised for the first time at the hearing. It was not raised when FSCO contacted the Applicant in February of 2011. It was not raised at the pre-hearing conference and not mentioned in the Agreed Statement of Facts. While it may have been imprudent for the Applicant not to raise this issue sooner, that is not relevant for our consideration as to whether it was intentional, reckless or negligent for the Applicant to fail to have insurance. Based on our finding that the Niles’ held a genuine and reasonable belief that the licence was surrendered, we find that the failure to have insurance was not intentional, reckless or negligent.

2. The second criterion is the extent of the harm or potential harm to others resulting from the Applicant’s failure to obtain E&O insurance. In our view there was no real harm, as there is no evidence the Applicant conducted any mortgage brokerage business during the period it was without insurance. While there was a potential for harm to the public as the Applicant could have commenced business during the period, given the Niles’ sincere belief that the Applicant was not licensed there was no potential for such harm.

3. The third criterion is the extent to which the person tried to mitigate any loss or take any other remedial action.

It is in the Applicant's favour that, upon realizing that the licence must still be in place and the Applicant was without insurance coverage, steps were immediately taken to obtain insurance. This behaviour is consistent with the Applicant’s previous reaction to failing to have insurance. The Tribunal found in its decision with respect to the Applicant's first hearing for failing to have insurance that Ms. Niles did, "as soon as she realized the seriousness of the situation – which was late in the game – take immediate action to obtain the necessary insurance. However, earlier she did not pay due attention, albeit unintentionally to the previous communications from the Financial Services Commission".

4. 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 lapsed months that it was without coverage but the holder of a licence under the Act during the second infraction.

5. 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. Apart from the failure to have insurance in 2008, 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 should be reduced to $1,000.

We turn now to whether the licence of the Applicant should be revoked.

This case presents a unique set of facts. The Superintendent’s position is that the licence should be revoked based on the failure of the Applicant to comply with the Act on two occasions. The Applicant has twice failed to comply with the requirement under the Act to have insurance. The Applicant did not maintain insurance the first time believing that it was not required while no business was being conducted and while it had RECO insurance. The Applicant failed to maintain insurance the second time believing that it has surrendered its licence. The Applicant was unaware that the licence was a continuous licence and at the commencement of the hearing was of the view that it was not licensed as a result of the failure to renew the licence on April 1, 2012. The Applicant is presumably without insurance at the present time on the mistaken belief that it is not licensed. Ms. Niles, the principal broker has not renewed her principal broker licence as of April 1, 2012.

It is, however, material to the consideration of whether or not to revoke the licence that the Tribunal has concluded that the second failure to have insurance was not intentional, reckless or negligent. The Tribunal concludes that the licence of the Applicant should be suspended for a period of six months for failure to comply with the requirements of the Act. The Applicant may use this period to determine if it wishes to successfully surrender its licence or to obtain insurance and take all steps necessary to comply with the requirements of the Act.

E. Order

We hereby direct the Superintendent, to suspend the licence of the Applicant for a period of six months commencing the date of this decision and to impose an administrative monetary penalty upon the Applicant in the amount of $1,000.

Dated at Toronto, Ontario, this 10th day of September, 2012.

“Anne Corbett”

Anne Corbett

Vice Chair of the Tribunal and Chair of the Panel

“Jennifer Brown”

Jennifer Brown

Member of the Tribunal and Member of the Panel

“Patrick Longhurst”

Patrick Longhurst

Member of the Tribunal and Member of the Panel