FINANCIAL SERVICES TRIBUNAL
2012 ONFST 5
Decision No. M0467-2011-1
IN THE MATTER OF the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29 (the “Act”), in particular sections 7, 19, 21, 38 and 39, and the following Regulations under the Act; the Mortgages Brokerages: Licensing Regulation, O. Reg. 408/07, as amended, in particular s. 1, the Mortgages Brokerages: Licensing Regulation, O. Reg. 410/07, as amended, in particular s. 2, the Mortgage Brokerages: Standards of Practice Regulation, O. Reg. 188/08, in particular ss. 4 and 42, and the Administrative Penalties Regulation, O. Reg. 192/08, in particular, section 3; and the Reporting Requirements for Licensees, O. Reg. 193/08, in particular sections 13 and 15;
AND IN THE MATTER OF Wexford Realty Corporation (“Wexford”);
AND IN THE MATTER OF a request for hearing pursuant to subsections 21(3) of the Act.
BETWEEN:
WEXFORD REALTY CORPORATION
Applicant
- and –
SUPERINTENDENT OF FINANCIAL SERVICES
Respondent
BEFORE:
Florence Holden Vice Chair of the Tribunal and Chair of the Panel
Jennifer Brown Member of the Tribunal and Member of the Panel
Jeffrey Richardson Member of the Tribunal and Member of the Panel
APPEARANCES:
Thomas Eyre For the Applicant
Larissa Easson For the Respondent
HEARD: March 6, 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 Mr. Thomas Eyre on behalf of Wexford Realty Corporation (the “Applicant” or “Wexford”).
The Superintendent of Financial Services (“Superintendent”) issued a Notice of Proposal to Revoke Licence and Notice of Proposal to Impose Administrative Monetary Penalty dated July 8, 2011 pursuant to sections 19, 21 and 39 of the Act.
On July 25, 2011 the Applicant requested a hearing before the Financial Services Tribunal (“Tribunal”) in respect of the Superintendent’s Notices of Proposal. The Superintendent subsequently 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 Wexford for the failure to have errors and omissions insurance, and if so, should the amount of the penalty be $3,000?
For reasons outlined below the Tribunal upholds the Superintendent’s decision to impose the proposed administrative monetary penalty on the Applicant of $3,000.
A. BACKGROUND AND FACTS
With the consent of both parties, the Tribunal accepted and considered an agreed statement of facts 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 Mr. Eyre, the sole shareholder, director and principal broker of the Applicant who gave evidence on behalf of the Applicant, and the affidavit evidence 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:
Wexford Realty Corporation (“Wexford”) is a licensed mortgage brokerage under the Act. Wexford has been licensed since April 7, 2008. Mr. Eyre was listed as the principal broker and director of Wexford 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 Wexford did not have E&O coverage for the period July 1, 2008 to November 12, 2008. After being contacted by FSCO, the Applicant subsequently obtained coverage with a start date of November 13, 2008. 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 one dated January 7, 2010, which both reminds brokerages and administrators of the requirement to have E&O insurance through an approved provider, and also indicated the plan for a 2010 FSCO audit. Such insurance requirement was also explicit on the Application for Principal Broker Renewal Licence form, such as that completed by the Applicant and signed by Mr. Eyre on March 31, 2010, prior to the expiry of the Applicant’s coverage.
The Superintendent conducted another audit of mortgage brokerages in October 2010 and determined that Wexford did not have E&O insurance coverage from one of the approved providers from July 1, 2010 to December 19, 2010.
The Superintendent requested information from Wexford 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.
Mr. Eyre replied on behalf of the Applicant on December 21, 2010 and affirmed that coverage had lapsed. He subsequently on January 3, 2011 provided the Superintendent with an insurance policy for the period December 20, 2010 to December 20, 2011.
Mr. Eyre’s evidence was that this second breach was unintentional and that he let it lapse following cancellation of his membership with the Canadian Association of Accredited Mortgage Professionals (CAAMP) in late 2009. While he had apparently been engaged in another business venture in 2010, he admitted under oath that he had kept the Applicant’s registration open to service renewals and friends and family. There is no evidence before us that Mr. Eyre notified the regulator of the failure to renew Wexford’s insurance.
We find that there was at least one completed transaction that occurred during the second period of no insurance in 2010, namely a mortgage financing arranged for a mortgage agent working for Wexford. 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.
Further we note that the Applicant filed a mandatory Annual Information Return (“AIR”) for the year 2010, indicating business was conducted.
On July 11, 2011, the Superintendent issued a notice of a proposal to revoke licence and to impose an administrative monetary penalty against Wexford pursuant to section 40 of the Act. Having accepted the Applicant’s surrender of its licence on or about December 16, 2011, this Tribunal is no longer concerned with the proposal to revoke Wexford’s 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 higher 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. Mr. Eyre indicated the Applicant’s premiums fell 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:
- (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”. Mr. Eyre is the principal broker and director of Wexford and, as such, should have had knowledge of its compliance requirements. He 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:
(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 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, 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)).
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 $3,000 as proposed by the Superintendent appropriate?
At the hearing, Mr. Eyre asked that no monetary penalty be imposed or that in the alternative it be reduced to the equivalent of unpaid premiums or approximately $680. For reasons outlined below the Tribunal upholds the Superintendent’s decision to impose the proposed administrative monetary penalties on the Applicant of $3,000.
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 Mr. Eyre 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 5 ½ months that he was without coverage but the holder of a mortgage brokerage licence under the Act.
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 $3,000 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. Mr. Eyre, as principal broker and sole shareholder and director was well aware of the requirements in 2010 for E&O insurance and conducted business during that period. Further although he may or may not have solicited new business, he admitted to the potential of renewal business or business from family and friends and chose to remain uninsured despite industry reminders and a previous failure for the same offence.
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.
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 action to remedy the breach in advance of being notified by the regulator, although he knew or should have known that he was in breach of the Act.
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 5 1/2 months which may be estimated to be approximately $680 as estimated by Mr. Eyre, and the commission of $2,317.70 earned on the 2010 mortgage financing noted in Mr. Eyre’s correspondence dated December 21, 2010.
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 Mr. Eyre.
On the facts of this case and taking account of all of the above criteria we have decided that the administrative penalty outlined in the Superintendent’s notice of proposal in the amount of $3,000 is appropriate and see no reason to alter the amount in the Superintendent’s notice of proposal.
E. ORDER
We hereby direct the Superintendent, by order to carry out his proposal to impose an administrative monetary penalty upon Wexford Realty Corporation in the total amount of $3,000.
Dated at Toronto, Ontario this 15^th^ day of March, 2012.
“Florence Holden”
Florence Holden Vice Chair of the Tribunal and Chair of the Panel
“Jennifer Brown”
Jennifer Brown Member of the Tribunal and Member of the Panel
“Jeffrey Richardson”
Jeffrey Richardson Member of the Tribunal and Member of the Panel