Nordale Realty & Associates Inc. v. Superintendent of Financial Services, 2012 ONFST 7

FINANCIAL SERVICES TRIBUNAL

2012 ONFST 7

Decision No. M0487-2011-1

Date: 2012/04/11

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 IN THE MATTER OF Nordale Realty & Associates Inc.;

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

BETWEEN:

NORDALE REALTY & ASSOCIATES INC.

Applicant

and

SUPERINTENDENT OF FINANCIAL SERVICES

Respondent

BEFORE:

Mr. Ralph Scane

Member of the Tribunal and Chair of the Panel

APPEARANCES:

For Nordale Realty and Associates Inc. (Nordale):

Mr. John Schirripa

Principal Broker

For the Superintendent of Financial Services (the Superintendent):

Ms Larissa Easson

Counsel

HEARD:

March 27, 2012

REASONS FOR DECISION

Background

This is a Request for Hearing arising out of Notices of Proposal, (NOP), each dated September 22, 2011, issued by the Superintendent, proposing to revoke the mortgage brokerage licence of Nordale, and to impose an administrative monetary penalty upon Nordale in the amount of $3500.

The NOPs were issued following an audit conducted by the Superintendent that determined that Nordale did not have Errors and Omissions insurance as required by the Superintendent during the period from July 1, 2009 until December 15, 2010, during which time Nordale held a brokerage licence under the Act. Such insurance is mandated by s. 7(4) of the Act, supplemented by s. 42 of The Mortgage Brokerages: Standards of Practice Regulation, O.Reg. 188/08. In the Agreed Statement of Facts filed by the parties, Nordale admits that it did not have the required insurance during the period alleged by the Superintendent. Nordale was notified of this omission on December 14, 2010, and supplied proof of insurance for the period December 16, 2010 until July 1, 2011. Nordale stated that it had not carried on any business coming within the scope of the Act during the period during which it was uninsured, and this assertion was not challenged by the Superintendent.

The Superintendent alleges that the failure of Nordale to maintain the required insurance during the period in question is aggravated by a similar failure to maintain insurance for the period July 2, 2008 (the date Nordale received its licence) until December 29, 2008. The failure to maintain insurance during this period is also acknowledged by Nordale in the Agreed Statement of Facts. On being notified of this omission, Nordale supplied proof of coverage from December 30, 2008, and advised the Superintendent that no mortgage brokerage business had been carried on during this period. Again, this assertion was not challenged by the Superintendent. The Superintendent took no further proceedings against Nordale arising out of the 2008 omission to carry insurance.

The Superintendent also alleges that Nordale’s failure to maintain proper insurance during the period in question is aggravated by an answer given by Nordale in its Annual Information Return filed for the calendar year 2009. In that return, Nordale stated that its E & O insurance provider was “Encon Insurance Managers Incorporated”, that its Policy Number was “739”, with an expiry date of “2010/07/01”. The Superintendent subsequently received information that such a policy did not exist. Nordale did not deny this at the hearing, but stated that the misinformation was a result of a mistake, and was not a deliberate attempt to mislead. The mistake is alleged to have arisen out of a misreading by the principal broker of an e-mail and attachments from Nordale’s insurance broker. This e-mail in fact advised that Nordale’s existing E & O policy was due for renewal on July 1, 2009, and the attached letter stated that an application form for renewal was enclosed, and should be completed and returned to the insurance brokerage no later than May 31, 2009, to allow for timely renewal. Although the letter did not mention it, the e-mail also appears to have attached a copy of the certificate for the policy about to expire on July 1 2009. The agreed documents filed by the parties do not include a copy of the application form. Mr. Schirripa stated that he believes he provided copies of everything he received in the e-mail, and had no specific recollection of an application form. In any event, Mr. Schirripa stated that he understood from the contents of the e-mail that the policy was being renewed, and took no further action. He recalled a telephone conversation with a representative of the insurance broker following receipt of this e-mail, but does not recall the contents of that conversation. The Superintendent did not rely upon a charge of supplying misleading information in his NOPs.

The Proposed Penalties

By s. 39(1) of the Act, the Superintendent is authorized to impose an administrative penalty on persons whom he is satisfied have contravened or not complied with a requirement established under the Act, other than certain requirements not relevant in this matter. Such penalties are imposed, as stated by s. 38(1) of the Act, “[t]o promote compliance with the requirements established under the Act”, and “[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.”

Criteria governing the amount of an administrative penalty to be imposed are provided by section 3 of The Administrative Penalties Regulation, O. Reg. 192/08:

3. 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:

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

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

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

7. 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.

8. 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 jurisdiction during the preceding five years by the person or entity.

Applying these criteria to the conduct of Nordale which gave rise to the NOP to impose an administrative monetary penalty, the Tribunal finds as follows:

1. The failure to carry E & O insurance during the period in question was grossly negligent. Nordale, through its principal broker, was well aware of the need for separate insurance apart from any required for the real estate business which it also carried on. This was not disputed. The e-mail message to Nordale from its insurance broker, warning that its existing policy was expiring and required renewal was unambiguous. Making all allowances for a human propensity to see what one wishes to see, the principal broker could scarcely have turned his mind at all to what the message actually said, in order to conclude that the renewal was being looked after without further action by Nordale, and that the attached copy of the certificate of the expiring policy was a certificate for the renewed policy. Even if the application form for a renewal was inadvertently omitted from the attachments to the e-mail, it was referred to in the attachments, and an omission should reasonably have given rise to an enquiry.

2. Although there was no actual harm to others, as Nordale was not carrying on a mortgage brokerage business, there was potential harm should Nordale have decided that it was opportune to commence business during the period when it was uninsured.

3. Nordale did take out insurance promptly after notification by the Superintendent.

4. Nordale saved almost one and one half years of premiums by not making a timely renewal of its policy.

5. It was not alleged that Nordale had failed to comply with any financial services legislation within the preceding five years.

In an affidavit filed at this hearing, Mr. Anatol Monid deposed that he is the Director of the Market Regulation Branch, Licencing and Market Conduct Division, of the Financial Services Commission of Ontario. He deposed, inter alia, that “[i]n the case of brokerages found to be in contravention of the E & O requirement for a second time (but were now in compliance), the Superintendent generally proposed a penalty of $3000.” In the present case, as noted above, the Superintendent is proposing an administrative penalty of $3500. Counsel for the Superintendent alleged that this increase was justified by the aggravating factor of the misinformation contained in the 2009 Annual Information Return. However, this misinformation was not relied upon as a ground in the NOP. The Tribunal finds that, however egregious was the principal broker’s negligence in reviewing the communication from his insurance broker that his E & O policy was expiring, it is not more probable than not that he deliberately decided against keeping up the policy. The misstatement in the Return should therefore be regarded as another consequence of his negligence. Nevertheless, the amount of premium saved over the 17.5 months in question, coupled with the extreme degree of carelessness exhibited here in maintaining insurance for the protection of the public, fully justifies the increase above the ordinary level proposed, and more. The Administrative monetary penalty should be increased to $4000.

The Superintendent is authorized by s. 19 of the Act to 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”. Section 18(1) in turn provides that the Superintendent may suspend a licence,

(a) if the licensee ceases to satisfy the prescribed requirements for the 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.

The Superintendent is authorized by s. 38(2) of the Act to revoke a licence in conjunction with the imposition of an administrative penalty.

It is clear that the statutory threshold for revoking the licence of Nordale is met. However, revocation is discretionary, and the question here is whether the discretion to revoke Nordale’s mortgage brokerage licence should be exercised.

The Tribunal recognizes that the protection of the public is the reason for the existence of the Act and its accompanying regulations. However, it must also weigh the fact that the revocation of a licence will have economic consequences for the licensee. Here, as business was not being carried out under the brokerage licence by Nordale, revocation will not interrupt an existing income flow. Nevertheless, at the hearing, Mr. Schirripa, the principal broker, indicated a strong desire to maintain the licence. He stated that procedures have been put into place to guard against the oversights that have led to Nordale’s existing problems which are being dealt with in this hearing. The inference that the activation of the licence may become part of Nordale’s business plan in the future is strong, so revocation cannot be said to be of little consequence to Nordale. The penalty of revocation, although based upon past infractions, looks forward in protecting the public. The administrative penalties to be imposed here against Nordale, arising out of its past lapses, have substantial sting, and may reasonably be expected to jolt the guiding minds of Nordale into a realistic appraisal of the necessity of extreme care in complying with the requirements of the regulated environment in which the licence it seeks to retain requires it to operate. Indeed, the administrative penalties imposed here should cause Nordale to speculate darkly upon the probable consequences should the Superintendent become aware of further infractions of any nature. Accordingly, the Tribunal considers that to add the penalty of revocation to the administrative penalty to be imposed at this time would be excessive, and not required in the public interest.

Orders

It is ordered that:

1. The Superintendent shall impose against Nordale an administrative penalty of $4000.

2. The Superintendent shall not proceed with the proposal to revoke the mortgage brokerage licence of Nordale.

Dated at Toronto this 11^th day of April, 2012.

“Ralph Scane”

Ralph Scane

Chair of the Panel and Member of the Tribunal