Authors
Partner, Financial Services, Toronto
Partner, Real Estate, Vancouver
The Provincial government announced on Friday, January 17, 2020, that it will be accepting feedback on two consultations to assist in its ongoing campaign to combat money laundering, tax evasion and fraud in the Province, namely (1) the Mortgage Brokers Act Review Public Consultation Paper [PDF] (MBA Consultation), and (2) the B.C. Consultation on a Public Beneficial Ownership Registry [PDF] (Beneficial Ownership Consultation). Interested stakeholders are encouraged to provide feedback by the deadline of March 13, 2020.
The announcement by the Ministry of Finance comes on the heels of the dissolution of the Financial Institutions Commission and the establishment of the new BC Financial Services Authority (BCFSA) on November 1, 2019. Since that time, we have been anticipating modernization and harmonization efforts from the Ministry (see the Osler 2019 Legal Year in Review for more details). The modernization of the Mortgage Brokers Act (MBA) is one of the many recommendations set out in the report titled Combatting Money Laundering in BC Real Estate published by the Expert Panel on Money Laundering in BC Real Estate in 2019. The same report recommended implementing the controversial Land Owner Transparency Act as swiftly as possible, and requiring corporations to maintain and disclose beneficial ownership information.
Below we discuss the key aspects of the two consultations.
MBA Consultation
The MBA Consultation begins by stating that the MBA has not kept pace with evolving national and international standards in consumer protection, changes to the industry and emerging issues such as money laundering. With a new regulatory authority, the opportunity is there to modernize not just the legislation itself, but the methods and tools of enforcement available under the MBA. However, it appears that the BCFSA is not currently intending a shift to a more principles-based regulatory model, which is often a cornerstone of modern legislation. Instead, the objective of the MBA Consultation is to broaden the scope of licensing requirements, enhance consumer protection, provide for further transparency and disclosure, including enhanced requirements for more complex products, and reduce regulatory gaps.
1. Licensing of mortgage brokers and exemptions
The MBA Consultation proposes to harmonize the criteria for mortgage broker registration with the criteria set out in other jurisdictions, such as Ontario and New Brunswick. Ontario is in the process of modernizing its legislation in this area (which is discussed in our previous Blog Post) and New Brunswick’s last significant update to its mortgage broker regime was in 2016.
Licensing harmonization could mean the inclusion of persons who carry on mortgage solicitation activities, the introduction of a broader “carrying on business test”, which is consistent with other jurisdictions, and the elimination of the current de minimis tests, such as the registration exemption for those who act as lender for less than 10 mortgage transactions. Per the proposed changes, the definition of “mortgage” would no longer be limited to mortgages on real property located in B.C., and further business activities could be captured by the MBA through regulations, in order to address changes in the industry. The MBA Consultation also proposes to add additional licensing categories to the legislation, which would distinguish between brokers and loan administrators.
Additional exemptions to the licensing requirement are also being considered by the Province, such as exemptions for persons registered under any securities legislation in Canada or those providing simple referrals. This is also consistent with exemptions found in other jurisdictions.
While the industry, and particularly those who operate in both B.C. and Ontario, may welcome more harmonization, we note that the proposed broad application of licensing requirements can be at odds with a modern, flexible approach. Entities that transact only with sophisticated parties may not require the same regulatory oversight as those who deal with consumers and small businesses. Fintechs and other entities looking to drive innovation may be unintentionally caught by the new legislation, particularly when tangentially engaging in activities that could be considered to be “soliciting”. The Ontario Report on Legislative Review of the Mortgage Brokerages, Lenders and Administrators Act, 2006 (Ontario Report), which was released on September 30, 2019 as a result of a review of Ontario’s mortgage broker legislation, noted the opportunity for right-sizing regulation; however, these sentiments are not present in the MBA Consultation.
2. Duty to act fairly, honestly and in good faith
The MBA Consultation proposes the inclusion of the following duties on licensed entities: (a) to act fairly, honestly and in good faith; (b) to comply with errors and omission insurance requirements; (c) to meet certain working capital requirements if handling trust funds; (d) to comply with the standards set for record keeping and retention; and (e) to comply with tied selling requirements. The Province suggests addressing the foregoing obligations in the body of the MBA with supplemental guidelines to be provided in the regulations, as most modern mortgage legislations contain similar duties and requirements. We note that only the legislation in New Brunswick provides for a specific duty of its license holders to act in good faith.
Perhaps one of the more significant questions posed by the MBA Consultation is whether there should be a positive obligation in the MBA to self-report misconduct. There are no proposed reporting parameters set out in the MBA Consultation. Without discretionary tools at the regulator’s disposal, this obligation could discourage licensing and compliance with this requirement.
3. Duty to borrowers
In addition to the duty of good faith, the Province is seeking input on whether licensed persons should act in the best interest of the borrower. This duty would include: (i) determining the suitability of a mortgage product for a borrower; (ii) disclosing the ownership structure of a brokerage; (iii) complying with prescribed rules regarding disclosure of conflicts of interest; and (iv) disclosing true costs of borrowing to individuals acting for business purposes. With respect to the last obligation, the current cost of credit disclosure requirements apply only where the loan is to an individual acting for personal, household or family purposes. The amended MBA would also address further requirements on reverse mortgages, including the need for independent legal advice and an extended cooling-off period.
Product suitability is a consumer protection trend that has been observed in many sectors of the financial services industry. However, this can be challenging to implement; for example it may be difficult to determine the level of diligence required as this may vary depending on the type of borrower and the nature of the product. It may also be inappropriate to impose a duty to act in the best interest of a borrower when the broker is dealing with a sophisticated entity. Stakeholders who deal with such sophisticated entities should consider responding to the question posed in the MBA Consultation regarding whether certain borrowers do not require the protection offered by a duty to determine mortgage suitability and more broadly, the other requirements that may be imposed by a duty to act in the borrower’s best interest.
4. Duty to lenders and investors
The MBA currently requires disclosure of investment information to all lenders and private investors with certain exemptions, including sophisticated persons such as regulated financial institutions, or circumstances where a prospectus has been provided. The Province is seeking feedback as to whether the requirement to disclose mortgage information should be restricted only to private investors. The MBA Consultation references the definition of “private investor” under New Brunswick’s laws, which is anyone other than a corporation with $5 million or more in net realizable assets, a trustee of a registered pension plan, another mortgage broker or a government entity. The MBA Consultation also raises the issue of whether brokerages may be required to avoid potential conflicts of interest in acting for both a borrower and a private mortgage investor by requiring that the borrower in such circumstances obtain representation from another brokerage.
Lastly, the MBA Consultation acknowledges the issue of dual regulation under both mortgage and securities laws, and the attendant difficulties arising from such duality. By way of background, as of January 1, 2019, mortgage investment entities such as mortgage investment corporations and mortgage syndications are now subject to the dealer registration regime in B.C. The MBA Consultation asks whether such dual regulation is necessary. We note that in Ontario, regulatory oversight of certain syndicated mortgage investments is in the process of being transferred from the Financial Services Regulatory Authority, which oversees mortgage brokers, to the Ontario Securities Commission.
5. Modern regulatory requirements and powers
The MBA Consultation proposes to provide the BCFSA with broader powers to regulate disclosure and amend other rules under the MBA. The amended MBA would also require all licensed brokerages to file annual information returns containing summaries of the number and dollar value of different types of mortgages placed. The Province is inviting comments on whether the amount of penalties under the MBA should be increased to deter non-compliance with the provisions of the legislation. This proposed amendment mirrors the recommendation made in the Ontario Report to strengthen the administrative monetary framework under that province’s legislation. However, as discussed above, there is no indication that the Province intends to provide the BCFSA with the power to grant exemptive relief.
Beneficial Ownership Consultation
As of May 1, 2020, all private companies under the B.C. Business Corporations Act are required to keep and maintain registers of its beneficial owners. The registry is accessible by law enforcement agencies, tax authorities and certain regulators prescribed by regulation. However, this beneficial information is unavailable to the public.
The Ministry of Finance is seeking input on whether or not the government should establish and maintain a publicly accessible registry of company beneficial ownership similar to the registry to be established pursuant to the Land Owner Transparency Act once that legislation comes into force. Consultation questions include the scope of the registry, the extent of public access, government oversight, costs, and enforcement.
Next steps
The B.C. Government will be accepting comments on the Beneficial Ownership Consultation and the MBA Consultation until March 13, 2020. After the consultation period, Ministry staff will analyze the feedback and prepare policy proposals for the Government’s consideration and possible legislative change. Consultation participants should note that their responses may be made public.
Osler welcomes the opportunity to work with our clients and various other industry stakeholders in providing meaningful feedback to the Province of B.C. regarding the consultations. Please contact the authors or any one of our lawyers to provide further assistance on this topic.
