Citation: First Commonwealth Mortgage Corporation v. Ontario (Superintendent Financial Services), 2015 ONFST 13 Decision No. M0555-2014-1 Date: 2015/04/27

IN THE MATTER OF the Mortgage Brokerages, Lenders and Administrators Act 2006, S.O. 2006, c. 29, in particular sections 7, 23, 24, 25, 30, 38 and 39, and Ontario Regulations 188/08, 191/08 and 192/08;

AND IN THE MATTER OF the Notice of Proposal to Impose Administrative Monetary Penalties (“AMPs”), dated June 25, 2014 issued by the Superintendent of Financial Services against First Commonwealth Mortgage Corporation;

AND IN THE MATTER OF a Hearing in accordance with subsection 39(5) of the Mortgage Brokerages, Lenders and Administrators Act 2006, S.O. 2006, c. 29.

and

RESPONDENT

BEFORE:

Bethune Whiston Chair of the Panel and Member of the Tribunal

Florence A. Holden Member of the Panel and Chair (Acting) of the Tribunal

Patrick Longhurst Member of the Panel and Member of the Tribunal

APPEARANCES:

For the Applicant – Mr. Jude Cassimy

For the Superintendent of Financial Services – Mr. Douglas Lee, counsel

Date HearD: February 11, 2015

REASONS FOR DECISION

I. INTRODUCTION

1The Applicant in this matter, First Commonwealth Mortgage Corporation (“First Commonwealth”), holds a mortgage brokerage licence. On June 25, 2014, the Superintendent of Financial Services (“Superintendent”) issued a Notice of Proposal to Impose Administrative Monetary Penalties (“NOP”) in which he proposed to impose general administrative monetary penalties totalling $5,500 on First Commonwealth. It is alleged in the NOP that an examination of First Commonwealth’s compliance with the Mortgage Brokerages, Lenders and Administrators Act 2006 (the “Act”) and certain of its regulations had disclosed seven contraventions.

2At the hearing, First Commonwealth was represented by its Principal Broker, Mr. Jude Cassimy (“Mr. Cassimy”). The Applicant did not challenge the Superintendent’s factual allegations, but argued that the proposed penalties were excessive in light of the relevant circumstances. While Mr. Cassimy was co-operative, credible and remorseful, in our view, the explanations offered by the Applicant do not excuse the undisputed contraventions or call for any reduction in the proposed penalties. For reasons that follow, we direct the Superintendent to impose penalties of $5,500 on First Commonwealth.

II. ISSUES

3The issues to be determined by the Tribunal at this hearing were:

a. Did First Commonwealth commit seven contraventions of the regulations to the Act; four contraventions related to sections of Ontario Regulation 188/08 made under the Act – Mortgage Brokerages: Standards of Practice (“O. Reg. 188/08”) (not having required documentation on site, not distributing documentation as required, non-disclosure of the appraisal fee to an investor/lender and non-disclosure of the number of lenders represented by the brokerage) and three related to sections of Ontario Regulation 191/08 made under the Act - Cost of Borrowing and Disclosure to Borrowers (“O. Reg. 191/08”) (non-disclosure of fees and disbursements to certain borrowers and not getting required signatures by borrowers)?

b. Is the imposition of the proposed AMPs appropriate? Will it promote compliance with requirements established under the Act and/or prevent First Commonwealth from deriving an economic benefit from its non-compliance, as described in subsection 38(1) of the Act?

c. What is the appropriate amount of the AMPs, taking into account the criteria contained in section 3 of Ontario Regulation 192/08 made under the Act?

As Mr. Cassimy admitted in his testimony and by the Agreed Statement of Facts that the contraventions were made, it is left to the Tribunal to decide issues b. and c.

III. FACTS

4Most of the evidence that is relevant to these issues is contained in an Agreed Statement of Facts (“ASF”) and an Agreed Book of Documents (“ABD”) filed with the consent of both parties with the Registrar’s office on December 17, 2014, and received by the Tribunal.

5In addition, the Tribunal heard oral testimony from two witnesses: 1) Anatol Monid, the Interim Executive Director of the Licensing and Market Conduct Division of the Financial Services Commission of Ontario (“FSCO”), and 2) Jude Cassimy, the Principal Broker of First Commonwealth. Mr. Monid offered testimony in support of a nine-page affidavit signed by him on November 26, 2014, and included in the ABD, the contents of which were not disputed by the Applicant.

6Having received and considered all of the evidence before us, the Tribunal makes the following findings of fact:

a. First Commonwealth is a mortgage brokerage with licence #10636 and Mr. Cassimy is a mortgage broker with licence #M08000610. Both licences were issued by the Superintendent under the Act. At all relevant times First Commonwealth was validly licenced and Jude Cassimy was its Principal Broker.

b. In each year between 2012 and 2014, the Market Regulation Branch of FSCO undertook targeted on-site examinations of selected mortgage brokerages to determine general compliance.

c. On or about April 1, 2014, FSCO corresponded with Mr. Cassimy to schedule an examination, pursuant to section 30 of the Act, of First Commonwealth’s business operations at its business premises. The examination date was mutually agreed upon and confirmed by letter, dated April 2, 2014.

d. In his letter, the FSCO examiner specified that “[w]e are particularly interested in the corporate governance or oversight of the mortgage brokerage and the policies and procedures that have established [sic] and implemented in accordance with O. Reg. 188/08, sections 40 to 48, as well as others. Please have the information contained in the attached Information Request Listing available for review upon our arrival…” The information Request Listing included, “[a]ccess to client mortgage files (samples will be selected on site)”.

e. On April 30, 2014, FSCO’s examiner attended at First Commonwealth to conduct the examination. He was unable to complete the examination on April 30 as certain information was unavailable on site at that time, and a further visit occurred on May 2, 2014, at which time the information was made available.

f. During the examination, FSCO’s examiner inspected the documentation related to five mortgage transactions. In respect of four of the five transactions there were contraventions. The examiner found a total of seven contraventions of the Act or the regulations under the Act.

g. Details of the contraventions were discussed with Mr. Cassimy on May 2, 2014 and were specified in Exit Meeting Notes signed by the examiner and Mr. Cassimy.

h. The exit meeting was followed up on May 7, 2014, with a letter from FSCO sent by email to Mr. Cassimy. The letter provided a summary of findings, which had been revised, but not significantly, from the Exit Meeting Notes, and specified, “[n]ote that a response to this letter indicating you have addressed the above findings is required. Further, this file is being escalated to a Regulatory Discipline Officer for possible enforcement action given the contraventions observed during the on-site examination”.

i. No response was received to the May 7, 2014 letter. However, on May 4, 2014, Mr. Cassimy sent an email to the FSCO examiner thanking him for the information he had provided and indicating “I will endeavor to use the information I received from you to ensure that I stay in compliance with your rules and regulations”.

j. The contraventions identified by the examiner can be summarized as follows:

i. Signed investor/lender disclosure statements (“ILDS”) were not in the mortgage files on April 30, 2014, the date of FSCO’s examination, for three files (i.e., files #143-2, #167-1 and #168-1) contrary to subsection 48(4) of O. Reg. 188/08. Mr. Cassimy obtained the signed IDLS’ from the lenders on May 1, 2014, and provided them to the FSCO examiner on May 2, 2014.

ii. ILDS’ for two syndicated mortgage files (i.e., files #167-1 and 168-1) were not provided to each investor/lender, but were only provided to the trustees of the investors/lenders, contrary to subsection 31(1) of O. Reg. 188/08.

iii. Appraisal fees of $350 were not disclosed in the ILDS given to the investor/lender on file #143-2, contrary to subsection 5(1) of O. Reg.191/08 and subsection 31(1) of O. Reg. 188/08.

iv. The borrower did not sign the Borrower Disclosure Statement (“BDS”) for file #143-2, contrary to section 6 of O. Reg. 191/08, however, the borrower did sign the waiver of the cooling off period. We have some comments respecting this contravention which we have set out under “Analysis and Decision” below.

v. Legal fees and disbursements of $850 were not disclosed to the borrower in the BDS for file #143-2, contrary to subsections 5(1) and 6(1) of O. Reg. 191/08.

vi. The appraisal fee was not disclosed on the BDS given to the borrower on file #158-2, contrary to subsections 5(1) and 6(1) of O. Reg. 191/08.

vii. The number of lenders represented by the brokerage in the past year was not disclosed in the BDS for file #143-2, contrary to section 19 of O. Reg. 188/08.

k. The $5,500 total in AMPs for the contraventions described above is made up of a $500 penalty for each of three contraventions; related to not having required documentation on site, not distributing documentation as required and not getting required signatures (items i., ii. and iv.), and a $1,000 penalty for each of four contraventions; related to non-disclosure of fees and disbursements and the number of lenders represented by the brokerage (items iii., v., vi. and vii.).

IV. STATUTORY FRAMEWORK

7The authority to impose a general administrative monetary penalty (“AMP”) on a brokerage or other licensee is found in sections 38 and 39 of the Act. When these provisions are read together, they provide that the Superintendent may impose a general AMP provided two 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) of the Act.

b. The AMP 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 such requirements.

8According to section 7(4) of the Act, licensed brokerages are required to “comply with such standards of practice as may be prescribed”. This section makes no distinction based on the number of agents and brokers at the brokerage or the amount of business it conducts.

9Standards of practice for mortgage brokerages have been prescribed in part by O. Reg. 188/08. According to section 40 of O. Reg. 188/08:

A brokerage shall establish and implement policies and procedures that are reasonably designed to ensure that the brokerage and every broker and agent who is authorized to deal or trade in mortgages on its behalf complies with the requirements established under the Act.

10The evidence before us provided details of the seven contraventions of the regulations to the Act; four contraventions related to sections of O. Reg. 188/08 and three related to sections of O. Reg. 191/08. As First Commonwealth’s Principal Broker, Mr. Cassimy is required to ensure its regulatory compliance with the Act and the regulations made under the Act.

11With respect to the amount of the AMP, section 41 of the Act provides a maximum penalty of $25,000 for a contravention or failure to comply by a brokerage such as First Commonwealth. In addition, Ontario Regulation 192/08 - Administrative Penalties (“O. Reg. 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 O. Reg. 192/08. These criteria are discussed below in the context of the Tribunal’s analysis.

12Pursuant to subsection 39(6) of the Act, when the Tribunal has held a hearing following a notice of proposal to impose an AMP, the Tribunal may, by order, direct the Superintendent to carry out the proposal, with or without changes, or substitute its opinion for that of the Superintendent. Hearings held pursuant to subsection 39(5) of the Act are de novo hearings.

V. Analysis AND decision

13Mortgage brokering is a heavily regulated activity. Superintendent’s counsel referred to a Supreme Court of Canada decision in La Souveraine Compagnie d’assurance général v. Autorité des marches financiers, 2013 SCC 63 at para. 49, which confirmed that strict standards are a typical feature of regulatory systems:

Those who engage in regulated activities agree in advance to adhere to strict standards, and they accept that they will be rigorously held to those standards, which are typical of such spheres of activity.

14Mr. Monid’s affidavit (at paragraphs 9, 11, 12, 14 and 49-51) provides important insight into the regulation of the “mortgage sector” and the setting of the AMPs for non-compliance with the legislative standards required of mortgage brokerages and mortgage brokers. We accept that portion of his affidavit, as follows:

Any system of regulation must be capable of being administered in a practical, cost effective way…Without a high rate of voluntary compliance, regulation becomes either prohibitively expensive or less effective because limited resources have to be spent to achieve non-voluntary compliance…

A low rate of voluntary compliance increases the cost of regulation. That increased cost must be paid by other licencees, including those fully in compliance, and inevitably by the public who will absorb some of those costs as higher fees.

…[the] requirements are designed to protect the public, as mortgages are major financial transactions involving significant amounts of borrowed money. Financial transparency of a transaction is key.

While some contraventions may be seen as “minor” or “inconsequential”, the Superintendent takes the position that each requirement is significant and has a purpose; otherwise, the Legislature would not have legislated them into law.

A mortgage brokerage’s failure to comply with seemingly “minor” regulations creates concern for the Superintendent that the mortgage brokerage lacks the minimum level of diligence required for mortgage brokering…

Accordingly, the amount of the AMPs proposed by the Superintendent are not trivial; instead [the AMPs] reflect the Superintendent’s exhortation to both the specific mortgage brokerage, and all mortgage brokerages in the industry, that such contraventions are unacceptable to meet the public’s trust. The amount of the AMPs are [sic] intended to have the effect of specific and general deterrence.

15This brings us to a consideration of the two issues we must decide.

Issue b: Is the imposition of the proposed AMPs appropriate? Will it promote compliance with requirements established under the Act and/or prevent First Commonwealth from deriving an economic benefit from its non-compliance, as described in subsection 38(1) of the Act?

16We can dispose of the second element of this test fairly quickly. It did not appear from the facts and the evidence that First Commonwealth had derived any direct material economic benefit from its non-compliance with the Act. First Commonwealth and/or Mr. Cassimy had received substantial brokerage fees on the syndicated mortgages, however, there is no direct link adduced between the non-compliance and the fees received.

17That brings us to the first element of the test: Will the AMPs promote compliance? FSCO depends on voluntary compliance from the sectors that it regulates. It is expensive for FSCO to go on site at brokerages and do reviews of mortgage transactions, therefore this can be done only on a limited basis. In order to convince the brokerage industry that the rules must be strictly adhered to, for the safety of the borrowing and lending public, FSCO must show that it is serious in its regulation of the requirements and that it will impose penalties when it finds that the requirements are not being met, even when it appears that an error or oversight is not substantial.

18In our view, if no penalty is imposed when non-compliance is discovered it would send a message to the brokerage industry that the strict requirements set out in the Act need not be complied with.

19This Tribunal has previously recognized the general deterrence effect of administrative penalties in Millennium Mortgage Corporation v. Superintendent Financial Services, 2009 ONFST 6 at page 11:

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 brokerage 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.

20We do have some comments to make respecting one of the contraventions and the clarity around the requirements of Section 6 of O. Reg. 191/08. As noted in paragraph 6(j)(iv) of this decision, the FSCO examiner indicated that the BDS for file #143-2 had not been signed by the borrower, contrary to section 6 of O. Reg. 191/08. Section 6 reads as follows:

(1) A mortgage brokerage must give the borrower a written disclosure statement that provides the information required by this Regulation.

(2) A disclosure statement may be a separate document or it may be part of another document.

21In this case, it appears that the BDS was part of another document, namely, the document required to indicate waiver of the cooling off period. At the bottom of page 2 of the BDS, the “Acknowledgement” section has a place for the borrower(s) to acknowledge receipt of a copy of the form and amortization schedule and confirm that they have reviewed the information. This part of the “Acknowledgement” was not signed. Immediately below the place for those signatures, there is a place for the borrower(s) to sign confirming waiver of the cooling off period. There were signatures waiving the cooling off period, and, since those signatures are part of a form which includes the BDS, it appears that the borrowers did receive the written disclosure provided on the BDS.

22The BDS is handled differently by FSCO than the ILDS. The Investor/Lender Disclosure Statement is one of the forms included under Mortgage Brokering Forms on the FSCO website and would, therefore, appear to be an approved form in accordance with section 54(1) of the Act, but the BDS is not included on the FSCO website. Although the BDS does not appear to be an approved form, written disclosure to the borrower is required by O. Reg. 191/08. The Applicant selected a specific type of form to use in order to satisfy the requirements of Section 6 of O. Reg. 191/08. The form selected indicates that signatures are expected both to indicate receipt and review of the required information and, separately, to indicate waiver of the cooling off period if that has occurred. As a signature is a reasonable requirement to assist in providing evidence that a person has received and reviewed the information to which they are entitled we find, in the absence of argument on the point by the parties, that Section 6 of O. Reg. 191/08 has been contravened.

23We find that it is appropriate to impose the proposed AMPs based on the facts in this case.

24We turn therefore to the remaining issue.

Issue c: What is the appropriate amount of the AMPs, taking into account the criteria contained in section 3 of Ontario Regulation 192/08 made under the Act?

25The Tribunal makes the following findings with respect to the application of the five criteria to the circumstances of this case:

a. The degree to which the contraventions were intentional, reckless or negligent: As noted by the Tribunal in Wong v. Superintendent Financial Services, 2009 ONFST 10:

“…this subsection suggests to us a consideration of the degree of what might be called moral turpitude, running from intentional disobedience of the law at the most severe end, through recklessness as to whether the law is or is not complied with, to mere carelessness in complying with requirements at the least severe end. In the context of the Regulation and the Act which gives it force, we are of the view that “negligent”, as used in the subsection, encompasses a lack of the degree of care and regard for the interests of the members of the public with whom a licence holder may expect to come in contact in the exercise of the privilege sought and enjoyed through the holding of the licence which the public may reasonably expect.”

There is no evidence to suggest that Mr. Cassimy intentionally contravened sections 19, 31(1), 31(3) and 48(4) of O. Reg. 188/08 or sections 5(1) and 6 of O. Reg. 191/08, therefore, the Tribunal does not find that First Commonwealth’s contraventions were intentional. Mr. Cassimy testified that he was confused and distracted during the period when these transactions took place (i.e., from January to August 2013), because of a serious, long-term, potentially fatal illness faced by someone in his immediate family, which had been diagnosed in 2012. These contraventions are consistent with a situation where a person is not paying adequate attention to detail. However, the legislation does not excuse a brokerage from complying with the strict requirements set out therein for any personal reason. In situations of personal hardship a person who has obligations to meet must make alternative arrangements to ensure that the obligations are met. Were these contraventions, therefore, reckless or negligent? In accordance with the above analysis in the Wong case, we find that the Applicant’s conduct showed a lack of the degree of care and regard for the interests of the members of the public that those members have reason to expect, and for that reason, the Applicant was at least negligent.

b. The extent of the harm or potential harm to others resulting from the contravention: There is no evidence that First Commonwealth’s contraventions caused actual harm to anyone. However, potential harm to the borrowers and lenders involved with First Commonwealth and to the public existed by virtue of the fact that full disclosure was not provided. Mortgage transactions are significant events in the lives of most people and involve large sums of money. The transactions must be transparent, so that all of the costs and risks are visible to those entering into the transaction. All borrowing costs must be disclosed, so that the true cost of the transaction is understood. The number of lenders represented in the prior year must be disclosed so that potential conflicts of interest can be identified. Copies of the documents supporting the transaction must be available at the relevant brokerage in the event one of the parties to the transaction requires a copy. Where syndicated mortgages are arranged, each individual lender/investor must receive a copy of the mortgage disclosure documentation so that they are properly informed. The risk of harm is substantial.

c. The extent to which First Commonwealth took any remedial actions: Two days following the Exit Meeting, on May 4, 2014, Mr. Cassimy indicated by email to FSCO’s examiner that he would endeavor to use the information received to ensure compliance with the rules and the regulations. Following that email, FSCO’s letter to Mr. Cassimy of May 7, 2014, specified that “a response to this letter indicating you have addressed the above findings is required”. A response was never received. No evidence was submitted by Mr. Cassimy on this point and the Tribunal has no way of knowing whether First Commonwealth took any remedial action to avoid these types of errors occurring in the future.

d. The extent to which First Commonwealth derived any economic benefit from its contravention: It would appear that First Commonwealth derived little economic benefit directly from the contraventions, but it did receive commission income from the related transactions.

e. Any other contraventions by First Commonwealth during the preceding five years: There is no evidence that First Commonwealth has contravened or failed to comply with any requirements of the Act or any other financial services legislation at any time previous to these occurrences. However, we note that the on-site examination in this case found a number of diverse errors in a small sample of transactions spanning an 11 month time period.

26In view of these findings, the Tribunal concludes that it has no reason to substitute the Superintendent’s decision with its own, and finds that the monetary penalties for First Commonwealth’s contraventions of the Act are appropriately set at $5,500.

VI. ORDER

27The Tribunal directs the Superintendent, by order, to carry out his proposal to impose administrative monetary penalties of $5,500 on the Applicant, First Commonwealth.

Dated at Toronto, this 27^th^ day of April, 2015.

“Bethune Whiston” Bethune Whiston

“Florence A. Holden” Florence A. Holden

“Patrick Longhurst” Patrick Longhurst