THE FINANCIAL SERVICES TRIBUNAL
2012 ONFST 8
Decision No. M0482-2011-1
IN THE MATTER OF the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29 (the “Act”), in particular sections 7 – 10, 14, 19, 21, 38 and 39;
AND IN THE MATTER OF H & N Fortune Enterprises Inc., o/a Easy Mortgage Centre;
AND IN THE MATTER OF a Request for Hearing pursuant to s. 39(5) of the Act.
BETWEEN:
H & N Fortune Enterprises Inc., o/a Easy Mortgage Centre
APPLICANT
-and-
Superintendent of Financial Services
RESPONDENT
BEFORE:
Mr. Ralph Scane Member of the Tribunal and Chair of the Panel
Ms Heather Gavin Member of the Tribunal and Member of the Panel
Mr. John Solursh Chair of the Tribunal and Member of the Panel
APPEARANCES:
For H & N Fortune Enterprises Inc. (“H & N”) Mr. Hilton Lam, Principal Broker
For the Superintendent of Financial Services (the ‘Superintendent”) Mr. Robert Conway, Counsel
HEARD: April 2, 2012
REASONS FOR DECISION
This is a hearing held pursuant to a Request for Hearing filed by H & N, pursuant to s. 21(3) of the Act, following a Notice of Proposal (“NOP”), dated September 7, 2011, issued by the Superintendent. The NOP proposes to impose an administrative penalty upon H & N of $2000, for failure to maintain required Errors and Omissions (“E & O”) insurance while holding a mortgage brokerage licence under the operating name “Easy Mortgage Centre”. Such insurance is required by s. 7(4) of the Act, supplemented by s. 42 of the Mortgage Brokerages: Standards of Practice Regulation, O. Reg. 188/08. H & N admits that it did not have such insurance during the period in question.
Background
The NOP was issued following an audit, conducted by the Superintendent, that determined that H & N did not have E & O insurance as required by the Act, during the period from April 2, 2010 until January 17, 2011, during which time H & N, operating as Easy Mortgage Centre, was licensed as a mortgage broker. H & N had held such a licence from April 2, 2008. The Superintendent notified H & N by e-mail on December 14, 2010, of this failure. This notice was returned as undeliverable, and a follow up notice was sent on December 17, 2010. There is no evidence that this later message did not go through, but, failing a response, a letter was sent in January, 2011, and acknowledged by the principal broker on January 17, 2011. This explained that Mr. Lam had been absent since December 10, 2010. At the hearing, Mr. Lam testified that he had been in Australia during this period, visiting ill parents. H & N subsequently obtained a proper policy effective from January 18, 2011.
In explanation for the lapse in coverage, Mr. Lam gave evidence that he believed a cheque had been sent to cover the premium for the period immediately following upon the expiration of his previous policy, and that the renewed policy was in force. However, he later discovered that the insurer had never received the cheque. If a cheque had been made out and sent, this would have been done by Mr. Lam’s wife, who kept the books for the brokerage business. Mrs. Lam did not give evidence. The only business accounting records produced to the Tribunal were a series of cheque stubs issued from August 1, 2009 to April 2, 2010. Unfortunately, two of the stubs in the series were missing, and one of these was said to have represented the cheque for the premium. Mr. Lam had no knowledge of why the stubs were missing, nor whether the cheque had actually been made out and sent. He had instructed that this be done, but he himself spent little time reviewing the accounts. He stated that both he and his wife were badly distracted by her parents’ illness. He himself was spending most of his time at another business, an information technology business, which was mostly performed at customers’ premises.
The NOP also alleged that H & N earned brokerage fees during the period that it was not insured. The Agreed Statement of Facts contains the following Statement.
“9. The principal broker said that the brokerage handled less than ten mortgage transactions in 2010. He did not disclose the amount of the brokerage fees received for those transactions.”
However, no further evidence touching this point was received at the hearing. Taking this paragraph as an admission by H & N that “less than ten” transactions took place in 2010, the only material before the Tribunal as to whether transactions took place within the portion of the year during which H & N was uninsured is found in the Request for Hearing filed by H & N upon receipt of the NOP. Under the heading, “What do you want the Tribunal to decide or order?”, H & N wrote, inter alia:
“Based on our record (sic) shown that from April 1st, 2010 to January 30th, 2010. (sic) The Brokerage only closing one deal and only got a commission paid out of $660 from TD bank.”
Although it is an easy inference that the year given in the latter date is a typographical error for “2011”, this unfortunately was not noticed or commented upon at the hearing, and so was not confirmed as such. Even if the inference is correct, and is taken as an admission, it would establish only one transaction during the uninsured period.
The Proposed Penalty
By s. 39(1) of the Act, the Superintendent is authorized to impose an administrative penalty on persons or entities whom he is satisfied have contravened or not complied with a requirement established under the Act, other than certain requirements not relevant here. Such penalties are imposed, as stated by s. 38(1) of the Act, “[to] 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 s. 3 of the Administrative Penalties Regulation, O. Reg. 192/08:
The Superintendent shall consider only the following criteria when determining the amount of an administrative penalty to be imposed under s. 39 of the Act for a purpose set out in s. 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 take 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 jurisdiction during the preceding five years by the person or entity.
Applying the above criteria to the conduct of H & N at issue here, the Tribunal finds as follows:
The failure to carry E & O insurance during the period in question here was clearly negligent. Allowing for the distractions caused by the health problems of Mr. Lam’s own family and that of his wife, and the fact that he was carrying on a separate and different business which took up much of his time, the management of the brokerage business on the part of the principal broker, and particularly the oversight of its accounts, was far short of the care needed and expected in operating a business strictly regulated for the public’s financial safety. However, the Tribunal does not find the omission to maintain insurance to have been intentional, or even reckless, to the extent that the latter word connotes indifference to whether rules are complied with or not.
There is no evidence of harm to others, but there was certainly potential harm, as the brokerage was apparently open for business during the uninsured period, even if largely inactive.
H & N did take out insurance after the omission was drawn to its attention.
H & N did save some premium expense during the uninsured period.
It was not alleged that this paragraph was applicable here.
Counsel for the Superintendent submitted that, although the penalty applied to brokerages found to be without E & O insurance at the 2010 audit, but who had not previously been found in breach of the Act or its subordinate regulations was generally set at $1500, the proposed penalty of $2000 was justified by the fact that H & N had actually conducted business during the period when insurance was not in place. We have referred above to the nature of the evidence, or lack of it, as to what business was actually done during the uninsured period. H & N pleaded for relief on the grounds of inability to pay. This is a ground which s. 3 of O. Reg. 192/08 does not permit to be considered. The Tribunal considers that the basic penalty of $1500 is fully justified, as being in line with what is imposed upon other offenders in similar circumstances. However, the Tribunal considers that, given the lack of any evidence that there was more than one transaction during the uninsured period, that this was not a deliberate act of disobeying the requirements, and that H & N had apparently been compliant as to insurance from the inception of its original licence under the Act awarded in April, 2008, until the failure in question here, it is not necessary in the public interest to add an additional amount for this occasion.
Order
The Superintendent is directed not to carry out the NOP, but instead to impose an administrative penalty of $1500 against H & N.
Dated at Toronto this 26th day of April, 2012.
“Ralph Scane”
Ralph Scane Member of the Tribunal and Chair of the Panel
“Heather Gavin”
Heather Gavin Member of the Tribunal and Member of the Panel
“John Solursh”
John Solursh Chair of the Tribunal and Member of the Panel