Joseph Picciani v. Superintendent of Financial Services, 2012 ONFST 4

FINANCIAL SERVICES TRIBUNAL

2012 ONFST 4 Decision No. M0464-2011-1 Date: 2012/03/14

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, 29, 38 and 39; the Mortgage Brokerages: Standards of Practice Regulation, O. Reg. 188/08, in particular section 42; and the Administrative Penalties Regulation, O. Reg. 192/08, in particular section 3;

AND IN THE MATTER OF a Notice of Proposal issued by the Superintendent of Financial Services to revoke the mortgage brokerage licence of Joseph Picciani (“Picciani”) and a Notice of Proposal to impose two administrative monetary penalties totalling $3,000 on this brokerage, sent by registered mail on July 18, 2011;

AND IN THE MATTER OF a Request for Hearing filed by Mrs. Noris Picciani on behalf of Mr. Joseph Picciani, the principal broker of Picciani, on July 25, 2011, pursuant to subsections 21(3) and 39(5) of the Act.

BETWEEN:

JOSEPH PICCIANI Applicant

• and –

SUPERINTENDENT OF FINANCIAL SERVICES Respondent

BEFORE: Mr. Denis Boivin, Member of the Tribunal and Chair of the Hearing Ms. Jennifer Brown, Member of the Tribunal and Member of the Panel Ms. Heather Gavin, Member of the Tribunal and Member of the Panel

APPEARANCES: Mr. Joseph Picciani, Principal Broker for Picciani, representing the Applicant Mr. Stephen Scharbach, Representing the Respondent, the Superintendent of Financial Services

HEARD: December 16, 2011

REASONS FOR DECISION

INTRODUCTION

1This hearing was requested Mr. Joseph Picciani pursuant to subsections 21(3) and 39(5) of the Mortgage Brokerages, Lenders and Administrators Act, 2006 (the “Act”). Mr. Picciani is the principal broker of Joseph Picciani (“Picciani”), a brokerage carrying his name. On June 24, 2011, the Superintendent suspended the licence of Picciani by way of an Interim Order and served Mr. Picciani with two notices: a Notice proposing to revoke the licence in question and a Notice proposing to impose two administrative monetary penalties totalling $3,000 on the brokerage.

2The Interim Suspension Order and the notices issued by the Superintendent stem from two allegations: 1) the alleged failure of the brokerage to have the required errors and omissions insurance between July 2, 2009 and June 24, 2011, and 2) the alleged failure of the brokerage to respond to a number of requests for information and documents made by the Superintendent.

3In essence, the Tribunal must determine whether these allegations have been proven and whether the enforcement measures proposed by the Superintendent are appropriate. For reasons that follow, we conclude that both allegations have been established, but that a monetary penalty of $2,000 is sufficient in light of all relevant circumstances.

STATUTORY FRAMEWORK

4Counsel for the Superintendent submits that the brokerage Picciani has contravened two distinct provisions of the Act, namely, subsections 7(4) and 29(2). According to the former, 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; the requirement to maintain errors and omissions insurance in a form approved by the Superintendent. According to subsection 29(2), licensees must give the Superintendent such information and documents “as the Superintendent may request ... in the manner and within the period specified” by him.

5With respect to these alleged contraventions, the Superintendent has proposed two enforcement measures: the revocation of the brokerage licence of Picciani and the imposition of an administrative monetary penalty of $1,500 for each of these two contraventions. The authority to revoke a licence 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”.

6The authority to impose an administrative monetary penalty is found in sections 38 and 39 of the Act. When they are read together, these sections provide that the Superintendent may impose a general administrative penalty on a mortgage brokerage provided two substantive conditions are met:

a. The brokerage is contravening or not complying with or has contravened or not complied with a requirement established under the Act, other than a requirement for which a penalty is provided under section 40 or a requirement prescribed under subsection 55(5)(a).

b. The penalty is aimed at promoting compliance with the requirements of the Act or at preventing the brokerage from deriving an economic benefit from not complying with said requirements.

7With 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 Picciani and 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.

8Two other provisions are relevant to this proceeding: subsections 21(4) and 39(5). According to them, when the Tribunal holds a hearing with respect to a proposal to revoke a licence or impose a general administrative penalty, it has the authority to “direct the Superintendent to carry out the proposal, with or without changes, or substitute its opinion for that of the Superintendent”. With respect to a proposed revocation, the Tribunal may also “impose such conditions as it considers appropriate”.

ISSUES

9There are four issues raised by this hearing: the first is whether the brokerage Picciani has contravened any of the requirements established by the Act, the second is whether the imposition of an administrative monetary penalty would serve either of the two purposes outlined in section 38 of the Act, the third relates to the quantum of the penalties being proposed, and the fourth is whether the revocation of Picciani’s brokerage licence is justified, having regard to the monetary penalties imposed on this brokerage.

EVIDENCE

10Most of the evidence in this matter is contained in the Agreed Statement of Facts (the “ASF”) and the Agreed Book of Documents (the “ABD”) filed by the parties and received by the Tribunal. The twenty paragraphs of the ASF are reproduced below, with added cross-references to the documents contained in the ABD:

1. Picciani holds a licence under the Act as a mortgage brokerage. It was first licenced on July 1, 2008, and it has held a brokerage licence continuously since then.

2. From July 1, 2008, until July 1, 2009, Picciani had E&O coverage from one of the approved providers as required by the Act.

3. That coverage lapsed on July 1, 20[09], and Picciani did not renew it.

4. In the fall of 2010, the Superintendent conducted an E&O audit to determine whether licenced brokerages were in compliance with the requirement to have E&O coverage. That audit determined that Picciani did not have E&O coverage as [of] the date of the audit – October 15, 2010.

5. On December 14, 2010, the Superintendent notified Picciani by email that the audit had determined that Picciani did not have E&O insurance. Picciani was asked to provide proof of coverage and indicate whether it had conducted any mortgage business. The email stated that a response was required by December 21, 2010. [ABD – Tab 3]

6. Picciani did not respond.

7. On February 4, 2011, a representative of the Financial Services Commission of Ontario (“FSCO”) sent a letter to Picciani by registered mail requesting a response to the December 14, 2010 email by February 16, 2010[sic]. [ABD – Tab 4]

8. Picciani did not respond.

9. On March 14, 2011, a representative of the Financial Services Commission of Ontario (“FSCO”) telephoned the principal broker, Joseph Picciani. Joseph Picciani stated that he has not conducted any mortgage brokerage business since obtaining a mortgage brokerage licence. He acknowledged that he received the email to his mortgage brokerage dated December 14, 2010, and the registered letter to his mortgage brokerage dated February 4, 2011. [ABD – Tab 6]

10. The FSCO representative informed Picciani on March 14, 2011 that mortgage brokerages that do not have E&O insurance may be prosecuted under the Act. Picciani stated that he will send a request to FSCO to surrender or terminate his mortgage brokerage licence. [ABD – Tab 6]

11. On March 23, 2011, a FSCO representative sent an email to Picciani requesting copies of its E&O insurance certificates for all periods that it was licensed. [ABD – Tab 7]

12. Picciani informed a FSCO representative by email dated March 31, 2010[sic] that his mortgage brokerage has been inactive since it was licensed, and that he would like to surrender his mortgage brokerage licence. [ABD – Tab 8]

13. On April 19, 2011, a FSCO representative sent a Surrender of Licence Declaration form to Picciani to complete and return in order to voluntarily surrender its mortgage brokerage licence. [ABD – Tab 8]

14. No further communication was received from Picciani.

15. On June 24, 2011, the Superintendent issued an interim order to suspend, a notice of proposal to revoke, and a notice of proposal to impose an administrative monetary penalty.

16. On October 18, 2011 Picciani applied to the Superintendent to surrender its mortgage brokerage licence.

17. Picciani did not have E&O coverage in place from July 2, 20[09], until the present, although it was licensed as a mortgage brokerage during that time.

18. FSCO produces and distributes a newsletter to licensed brokerages entitled “Mortgage Broker e-info Newsletter”. It is sent via email to every licenced principal broker in Ontario and provides updates on the implementation and requirements of the new MBLAA and regulations.

19. It is sent to the email address that principal brokers provide to FSCO.

20. 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 (12, 13 and 15) FSCO provided information and reminders to principal brokers about the requirement that brokerages have E&O coverage. [ABD – Tab 10]

11In addition to relying on the ASF and ABD, counsel for the Superintendent called one witness, Mr. Anatol Monid, the Director of the Market Regulation Branch, Licensing and Market Conduct Division, of the Financial Services Commission of Ontario (“FSCO”). Generally speaking, Mr. Monid testified about the planning and carrying out of audits that were conducted in 2008 and 2010 to determine compliance by mortgage brokerages with the requirement that they have errors and omissions coverage. In addition, he testified about the purpose of errors and omissions insurance and about the “progressive approach” taken by FSCO, following both audits, in order to ensure that brokerages without insurance became compliant. Of significance, Mr. Monid testified that the rate of non-compliance had gone from 30% (the results of the 2008 audit) to only 6% (the results of the 2010 audit), an improvement that he attributes 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.

12Mr. Monid also testified about the factors that were considered by the Superintendent, following the 2008 and 2010 audits, in proposing administrative monetary penalties of $1,000 (in 2008) and $1,500 (in 2010) for first-time offenders such as the Applicant Picciani. In particular, Mr. Monid testified that a 50% increase in the proposed minimum penalty was justified, since the Act and its requirements were no longer new. He testified about another change in the enforcement measures taken by the Superintendent following the 2010 audit: licensees who failed to respond to requests for information concerning their errors and omissions coverage would receive an additional penalty of $1,500. According to Mr. Monid, this amount would demonstrate the importance of responding to the Superintendent and its delegates “without being too harsh”. However, when asked by the Tribunal, Mr. Monid stated that it is “far more important” for the Superintendent to ensure that licensees have errors and omissions insurance, than that they respond promptly to requests for information.

13During the hearing, Mr. Picciani testified under oath on behalf of the Applicant. According to his testimony, Mr. Picciani has been in the real estate industry since 1973 and knows the importance of errors and omissions insurance. He admits to not having insurance during the period in question, but he believes the following circumstances mitigate his omission: during the relevant timeframe, the Applicant did not conduct any mortgage business, profit from any deals or represent itself as being a mortgage brokerage. Obtaining a licence under the Act, according to this testimony, was part of a business plan that never materialised. Simply put, he did not have the time to operate the brokerage and therefore never dealt in mortgages.

14Mr. Picciani testified that he did not receive the emails sent to him on December 14, 2010 and March 23, 2011 – the communications referred to in paragraphs 5 and 11 of the ASF. Although the email address used in these two communications was the one he had provided, in his original application for a brokerage licence, the account associated with this address had been closed in September of 2010, unbeknownst to FSCO. However, according to his testimony, he did receive the letter dated February 4, 2011 and the email sent on April 19, 2011 to his new address– the communications referred to in paragraphs 7 and 13 of the ASF. Mr. Picciani could not recall why he did not respond to the letter, but said that “things [were] happening in [his] life” at that time. With respect to the April email, he testified that he was leaving the country the same day and provided a copy of his flight itinerary (ABD – Tab 9). In addition, he claimed that he did not know that the Surrender of Licence Declaration form attached to the email had to be completed and returned to FSCO in order for the brokerage licence to be surrendered.

ANALYSIS

Issue 1: The Contraventions

15On the basis of the evidence outlined above, the Tribunal concludes that both contraventions alleged by the Superintendent have been established. For a period of approximately two years (from July 2, 2009 to June 24, 2011), the brokerage Picciani was in contravention of the requirement imposed by subsection 7(4) of the Act, namely, the requirement to comply with the standards of practice prescribed for brokerage licences. Liability insurance is a standard prescribed by section 42 of Ontario Regulation 188/08 and Mr. Picciani, as principal broker, had the statutory obligation to carry out his powers and duties in accordance with said regulation: subsection 7(6) of the Act.

16In addition, Mr. Picciani did not respond to a specific request made by a delegate of the Superintendent, following the audit of October 2010, to provide proof that his brokerage had the required coverage and to provide information about whether Picciani was conducting any mortgage business. This request was sent by registered mail on February 4, 2011, and was a follow-up to an email sent on December 14, 2010, requesting the same information and documents. The letter required a written response by February 16, 2011, and warned the recipient that failure to respond was a violation of the Act. During his testimony, Mr. Picciani acknowledged receiving this letter, but said that he did not respond because of “things happening in [his] life”. He did not recall what those things were and provided no other reason for his failure to respond.

17During his testimony, Mr. Picciani claimed that he did not receive the email of December 14, 2010. This evidence conflicts with the notes taken by Steve Yamamoto of FSCO on March 14, 2011, following his conversation with Mr. Picciani (ABD – Tab 6). However, even if the Tribunal were to accept the testimony of Mr. Picciani, the fact remains that he failed to respond to the letter sent by registered mail on February 4, 2011, without any justification whatsoever. Indeed, almost an entire month transpired between the deadline imposed by FSCO (February 16) and the telephone conversation initiated by Mr. Yamamoto (March 14).

18During his submissions, counsel for the Superintendent argued that the Applicant also failed to respond to the email sent to Mr. Picciani on April 19, 2011, in which a FSCO representative provided him with a “Surrender of Licence Declaration” form. This email was sent in response to representations made by Mr. Picciani regarding his desire to surrender the brokerage licence of Picciani, representations made during the telephone conversation of March 14 with Mr. Yamamoto (ABD – Tab 6) and repeated in a subsequent email to FSCO dated March 31 (ABD – Tab 8). The application was not sent to FSCO until October 18, 2011.

19Notwithstanding this delay of six months, the Tribunal does not view this aspect of the Applicant’s conduct as an independent contravention of subsection 29(2) of the Act or as an aggravating factor. Indeed, the email of April 19th asked Mr. Picciani to “complete and return [the form] at [his] earliest convenience” (ABD – Tab 8). During the hearing, Mr. Picciani testified that he left for Italy on April 19th and did not return to Canada until September 20th. He provided a copy of his flight itinerary (ABD – Tab 9) and his testimony is also corroborated by the Request for Hearing form completed by Mrs. Noris Picciani, in his name, on July 25, 2011. The Tribunal accepts his evidence and, in view of the absence of any specific response date included in the email of April 19, 2011, the Tribunal concludes that Picciani’s contravention of subsection 29(2) is limited to his failure to respond to the letter sent by registered mail on February 4, 2011.

Issue 2: The Purposes

20With respect to the Applicant’s contravention of subsection 7(4) of the Act, the Tribunal concludes that both purposes listed in subsection 38(1) would be served by the imposition of an administrative monetary penalty. Even though there is no evidence that the Applicant conducted any mortgage business between July 2, 2009 to June 24, 2011, the brokerage remained licensed throughout this period of twenty-three months and benefited from not having to pay the errors and omissions premiums that were required in order to be compliant with the Act. Furthermore, the imposition of a monetary penalty on Picciani serves to remind brokerages that liability insurance is one of the most important requirements of the Act, a requirement designed to protect the public from the financial consequences of negligence and fraud by a brokerage or its authorised agents and brokers.

21With respect to the Applicant’s contravention of subsection 29(2), there was no suggestion that this brokerage derived an economic benefit from not responding to the letter sent by the Superintendent’s delegate on February 4, 2011. However, the Tribunal concludes that the imposition of a monetary penalty would serve the deterrence function listed in subsection 38(1) of the Act. The Superintendent cannot effectively perform his mandate to protect the public interest and enhance public confidence in the mortgage industry without the appropriate information and without the cooperation of those who have this information. As such, subsection 29(2) of the Act authorises the Superintendent to request information and documents from licensees and requires them to respond in the manner and within the period specified. During the hearing, Mr. Monid testified that FSCO has no practical way of knowing whether an uninsured licensee is conducting mortgage business. Representatives of FSCO must communicate with licensees in order to obtain this information and, in this case, they tried to communicate with the Applicant’s principal broker by email, by registered letter, and by telephone. Even on the assumption that Mr. Picciani did not receive the email of December 14, 2010, his failure to respond to the subsequent letter warrants a reprimand. The letter was unequivocal, it imposed a reasonable deadline, it warned the recipient of the consequences of not responding, and it was sent by registered mail. Licensees cannot ignore a request for information of this nature, without a reasonable explanation. Imposing a monetary penalty on the Applicant would send a clear message to this effect.

Issue 3: The Amounts

22In light of the conclusions reached above, two distinct monetary penalties are justified: one for the Applicant’s failure to have errors and omissions insurance and one for its failure to respond to the request for information sent by the Superintendent’s delegate. In determining the amount of each 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 Picciani’s contraventions were intentional, reckless or negligent: Mr. Picciani knew about the requirement for errors and omissions insurance, since his brokerage had insurance in place during the first year it was licensed. In his testimony, Mr. Picciani did not provide any rationale for not renewing the policy of his brokerage in July of 2009, other than the fact that he was not conducting any mortgage business. Accordingly, the Tribunal finds that the Applicant’s contravention of subsection 7(4) was intentional. With respect to Picciani’s failure to respond to the Superintendent’s request for information, the only explanation provided by Mr. Picciani was that “things [were] happening in [his] life.” Since no details were provided to the Tribunal to explain or substantiate this claim, we give little weight to this evidence. In light of the seriousness of the subject-matter discussed in the letter of February 4, 2011, the Tribunal concludes that the non-responsiveness of the Applicant was negligent at best.

b. The extent of the harm or potential harm to others resulting from Picciani’s contraventions: There is no evidence that the Applicant engaged in any mortgage business between July 2, 2009 and June 24, 2011, the timeframe during which the Applicant was in breach of subsection 7(4) of the Act. Nonetheless, potential harm to the public existed by virtue of the fact that the Applicant was licensed and therefore available to carry on business without the insurance protection required by law. With respect to the contravention of subsection 29(2), there is no evidence to suggest that the Applicant’s non-responsiveness resulted in any harm or potential harm, either to the public or to the Superintendent, distinct from the risk already created by the Applicant’s failure to be insured.

c. The extent to which Picciani took any remedial actions: With respect to the contravention of subsection 7(4), the Applicant was uninsured for approximately two years. As noted above, this contravention was not an oversight or the result of negligence; it was an intentional decision made by Mr. Picciani. The Applicant took no remedial action whatsoever between July 2, 2009 and March 14, 2011, the date a representative from FSCO telephoned Mr. Picciani regarding his failure to respond to the registered letter sent on February 4, 2011. During this telephone conversation, Mr. Picciani expressed his desire to surrender the licence of the brokerage, and he repeated himself in a subsequent email dated March 31, 2011. According to his testimony, he believed that nothing further was required from him, and he left the country on April 19th – the same day that a representative of FSCO sent him a Surrender of Licence Declaration to be returned at his “earliest convenience”. The Tribunal did not hear any evidence that contradicts this testimony, or that contradicts Mr. Picciani’s claim that he did not receive the email in question, and the Tribunal is prepared to give him the benefit of the doubt. However, the fact remains that his brokerage was in contravention of subsection 7(4) of the Act for approximately twenty months and that he took no action during this timeframe to either correct the situation or to inform FSCO that he desired to surrender the licence of his brokerage. Likewise, with respect to the Applicant’s second contravention, the failure to respond to the letter sent by registered mail, there is no evidence that Mr. Picciani took any remedial actions on behalf of his brokerage.

d. The extent to which Picciani derived any economic benefit from its contraventions: The Applicant obtained an economic benefit by virtue of retaining a licence to carry on a mortgage brokerage business, while avoiding payment of any liability insurance premiums for approximately two years. This benefit is modest, yet real; it corresponds to twice the amount that Mr. Picciani paid to insure his brokerage from July 1, 2008 to July 1, 2009. With respect to the Applicant’s failure to respond to the Superintendent’s delegate, there is no evidence to suggest that the brokerage derived any other economic benefit from this contravention, either directly or indirectly – and counsel for the Superintendent did not make any submissions in this respect.

e. Any other contraventions by Picciani during the preceding five years: This criterion has no application in the circumstances of this case. There was no suggestion that Picciani has, in the past, failed to comply with any other requirement under the Act or with any other legislation.

23In view of these findings, the Tribunal reaches the following conclusions:

a. The appropriate monetary penalty for the Applicant’s failure to have the required liability insurance is $1,500.

b. The appropriate monetary penalty for the Applicant’s failure to respond to the request for information sent by registered mail is $500.

Issue 4: The Revocation

24On October 18, 2011, the Applicant applied to the Superintendent to surrender its mortgage brokerage licence. According to counsel for the Superintendent, this application is on hold until the Tribunal reaches its decision. As a result, the Notice of Proposal to revoke the brokerage licence of Picciani remains a live issue.

25There may be circumstances where the Superintendent’s mandate to protect the public interest and enhance public confidence in the mortgage industry is better served by revoking a licence than by accepting an application to surrender the licence. However, in this case, there is no justification to order the Superintendent to carry out his proposal to revoke the Applicant’s licence.

26Pursuant to subsection 20(3) of the Act, the Superintendent must accept an application such as Mr. Picciani’s unless there are reasonable grounds to believe that the surrender would not be in the public interest. During his closing submissions, counsel for the Superintendent conceded that the public interest was not at stake here. Thus, nothing stopped the Superintendent from accepting Picciani’s application, even though a hearing had already been requested.

27Revocation is one of the most serious enforcement measures available under the Act and regulations. In light of the administrative monetary penalties imposed on the Applicant, the absence of any danger to the public interest, and the application made by Mr. Picciani, the Tribunal concludes that an order to revoke is not warranted. That being said, the Tribunal is prepared to suspend the licence of Picciani until the application is accepted or until the expiry of this licence, whichever date comes first. This will ensure that Picciani is not in contravention of subsection 7(4), following the release of this decision and the expiry of the interim suspension order.

ORDER

28The Tribunal directs the Superintendent, by order, to carry out his proposal to impose two administrative penalties on the Applicant Picciani in the amounts of $1,500 and $500. In addition, the Tribunal orders the suspension of Picciani’s brokerage licence until its application to surrender is accepted by the Superintendent, or until the expiry of said licence, whichever date comes first.