Citation: Centum Coachwood Mortgage Corporation v. Ontario (Superintendent Financial Services), 2015 ONFST 15 Decision No. M0593-2014-1 Date: 2015/05/11

IN THE MATTER OF the Mortgage Brokerages, Lenders and Administrators Act, 2006, S.O. 2006, c. 29 (the “Act”), in particular sections 7(4), 38 and 39, and Ontario Regulation 188/08 under the Act, in particular sections 19(1) and 44(2);

AND IN THE MATTER OF the Notice of Proposal to Impose Administrative Monetary Penalties, dated August 5, 2014 issued by the Superintendent of Financial Services against Centum Coachwood 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

Patrick Longhurst Member of the Panel and Member of the Tribunal

Jeffrey Richardson Member of the Panel and Member of the Tribunal

APPEARANCES:

For the Applicant – Mr. Vince Grillone

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

Date HearD: February 13, 2015

REASONS FOR DECISION

I. INTRODUCTION

1The Applicant in this matter, Centum Coachwood Mortgage Corporation (“Centum Coachwood”), holds a mortgage brokerage licence. On August 5, 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 (“AMPs”) totaling $2,000 on Centum Coachwood. It is alleged in the NOP that an examination of Centum Coachwood’s compliance with the Mortgage Brokerages, Lenders and Administrators Act, 2006 (the “Act”) and one of its regulations had disclosed two types of contraventions.

2At the hearing, Centum Coachwood was represented by its Principal Broker, Mr. Vince Grillone (“Mr. Grillone”). The Applicant did not challenge the Superintendent’s factual allegations, but argued that the proposed penalties were excessive in light of the relevant circumstances. In our view, the arguments put forward 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 $2,000 on Centum Coachwood.

II. ISSUES

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

a. Did Centum Coachwood, on four occasions, fail to disclose in writing to a borrower the number of lenders it had acted for as a representative in the previous year, and by doing so, did it fail to comply with section 7(4) of the Act and section 19(1) of Ontario Regulation 188/08 – Mortgage Brokerages: Standards of Practice (“O. Reg. 188/08”)?

b. If the answer to issue a. is yes, should an AMP be imposed and in what amount?

c. Did Centum Coachwood pay commission for dealing in mortgages on its behalf to a broker affiliated with another brokerage, and by doing so, did it fail to comply with section 7(4) of the Act and section 44(2) of O. Reg. 188/08?

d. If the answer to issue c. is yes, should an AMP be imposed and in what amount?

As Mr. Grillone 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 d.

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 January 26, 2015, 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) Vincent Grillone, the Principal Broker of Centum Coachwood. 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. Centum Coachwood is a mortgage brokerage with licence #10072 and Mr. Grillone is a mortgage broker with licence #M08000654. Both licences were issued by the Superintendent under the Act. At all relevant times Centum Coachwood was validly licensed and Vince Grillone 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 March 27, 2014, FSCO corresponded with Mr. Grillone to schedule an examination, pursuant to section 30 of the Act, of Centum Coachwood’s business operations at its business premises. The examination date of April 3, 2014, was mutually agreed upon and confirmed in writing.

d. On April 3, 2014, FSCO’s examiner attended at Centum Coachwood to conduct the examination. The scope of the examination was focused on compliance with the Act and its regulations, including the policies and procedures that were to be established and implemented in accordance with O. Reg. 188/08.

e. 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. During the examination, the examiner found at least two types of contraventions of the Act or the regulations under the Act.

f. Centum Coachwood and/or Mr. Grillone had received brokerage fees on each of the mortgages in question.

g. Details of the contraventions were discussed with Mr. Grillone on April 3, 2014, and were specified in Exit Meeting Notes signed by the examiner and Mr. Grillone.

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

i. The number of lenders represented by the brokerage in the past fiscal year was not disclosed in the Borrower Disclosure Statements (“BDS”) for four mortgage files (i.e., files 2469-2, 2816-1, 2194-1 and 2750-1) contrary to s. 7(4) of the Act and s. 19 of O. Reg. 188/08.

ii. In a co-brokered transaction, the Applicant paid a commission to the mortgage agent of another brokerage, when it should have paid the commission directly to the other brokerage, contrary to s. 7(4) of the Act and s. 44(2) of O. Reg. 188/08.

i. Mr. Grillone wrote a letter to the examiner dated April 29, 2014, in which he indicated as follows:

I have not done a co-broker deal in 10 yrs [sic]. I was unaware of that policy but I fully understand it and will make sure if it happens again that the funds are paid to the Brokerage Firm and not the Agent…

Number of Lenders represented by brokerage in previous year is now part of a checklist so that I do not miss this in the future…I have thoroughly reviewed the sections of the Standards of Practice and now have a firm grasp of all the procedures that the Principal Broker must follow.

j. The Superintendent proposed to impose an AMP of $1,000 in respect of each of the above types of contraventions, for a total of $2,000 in AMPs.

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 when:

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; and

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 two types of contraventions of Regulation 188/08 to the Act. As Centum Coachwood’s Principal Broker, Mr. Grillone 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 Centum Coachwood. 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, meaning that we start afresh to look at the evidence and draw conclusions.

V. ANALYSIS AND DECISION

13Mortgage brokering is a heavily regulated activity. Superintendent’s counsel referred us to a Supreme Court of Canada decision which this Tribunal has previously relied upon. In La Souveraine Compagnie d’assurance général v. Autorité des marches financiers, 2013 SCC 63 at para. 49, it is explained 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, 49-51 and 53) 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 those portions 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.

…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…

If the mortgage brokerage has one or more contraventions or other failures to comply with the MBLAA or its regulations, the Superintendent typically proposes higher penalties to emphasize the multiplicity of these contraventions.

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

Issues b. and d. can be addressed at the same time: If the answer to issues a. and c., i.e., have the contraventions occurred?, is yes, should AMPs be imposed and in what amount?

16In accordance with subsection 38(1) of the Act, an AMP may be imposed to promote compliance with the Act or to prevent a person from deriving an economic benefit, directly or indirectly, from their noncompliance. We can dispose of the second element of this test fairly quickly. It did not appear from the facts and the evidence that Centum Coachwood had derived any direct material economic benefit from its non-compliance with the Act. Centum Coachwood and/or Mr. Grillone had received brokerage fees on each of the 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 its decisions, including 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 find that it is appropriate to impose the proposed AMPs based on the facts in this case.

21We turn therefore to the amount of the AMPs.

22The 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. Grillone intentionally contravened sections 19 or 44(2) of O. Reg. 188/08, therefore, the Tribunal does not find that Centum Coachwood’s contraventions were intentional. With respect to the contraventions related to disclosure, Mr. Grillone testified that he and a number of people he informally surveyed after the on-site examination by FSCO’s examiner felt that the information respecting number of lenders dealt with during the prior year was not important and did not protect the client. However, it is not left up to brokers or the brokerages with which they work to determine what disclosure is important and what disclosure will be provided on any transaction. The rules respecting disclosure are clear, they are strict, and they always have to be followed. With respect to the improperly paid commission, the Tribunal has some concern that Mr. Grillone did not think to review the written policies and procedures maintained at the brokerage to determine the requirements related to co-brokered deals when he had not participated in that type of transaction in some time. In his oral testimony, Mr. Grillone indicated that it did not even dawn on him to review the policies and procedures in respect of that transaction. In our view, when working in a highly regulated area where policies and procedures are required to be maintained by each brokerage, it is wise to regularly refresh ones memory on the requirements for completion of transactions, especially with respect to transactions that may not be commonly experienced at that brokerage.

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. In other words, it was careless, 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 Centum Coachwood’s contraventions caused actual harm to anyone. However, potential harm to the borrowers and lenders involved with Centum Coachwood and to the public existed. The number of lenders represented in the prior year must be disclosed so that potential conflicts of interest can be identified. While it is not prohibited and may not be suspect in any way, it is appropriate and required to disclose if the brokerage has only dealt with one or a limited number of lenders in the prior year. This provides the borrower with information and the borrower can decide what, if anything, to do with that information. With respect to the improper payment of commission, it is a question of appropriate supervision. Each licensed broker or agent is associated with (authorized to sell for) one or more particular brokerages and they are supervised by the principal broker of the brokerage(s). A brokerage with which they are not associated is restricted from paying a commission directly to such broker or agent, but rather the commission must be paid to their brokerage. If the rules were otherwise it would permit a broker to continue to work and receive remuneration, and potentially continue to misbehave, even though he or she may have committed some misconduct at the brokerage with which he or she is associated. Mortgage transactions are significant events in the lives of most people and involve large sums of money. Fraudulent activity occurs in this sphere. The transactions must be transparent and follow the prescribed rules, so that all of the risks are visible to those entering into the transaction. Where information is withheld and rules are broken the risk of harm is substantial.

c. The extent to which Centum Coachwood took any remedial actions: Mr. Grillone indicated by letter to FSCO’s examiner dated April 29, 2014, that he had taken action in order to correct all of the issues that had been brought to his attention. Namely, he had revised a checklist to add “number of lenders represented by brokerage” and he had reviewed the sections of the “Standard of Practice” in order to gain “a firm grasp of all the procedures that the Principal Broker must follow”. We agree that these are useful actions to take and encourage regular review of the policies and procedures, as appropriate.

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

e. Any other contraventions by Centum Coachwood during the preceding five years: There is no evidence that Centum Coachwood 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 errors in a small sample of transactions.

23In 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 Centum Coachwood’s contraventions of the Act are appropriately set at $2,000.

VI. ORDER

24The Tribunal directs the Superintendent, by order, to carry out his proposal to impose administrative monetary penalties of $2,000 on the Applicant, Centum Coachwood.

Dated at Toronto, this 11th day of May, 2015.

“Bethune Whiston” Bethune Whiston

“Patrick Longhurst” Patrick Longhurst

“Jeffrey Richardson” Jeffrey Richardson