In FSRA’s recent examinations and discussions with the sector, we found that some licence holders assume all institutional lenders, such as Mortgage Investment Entities (MIEs) and Mortgage Investment Corporations (MICs, which are a subset of MIEs), automatically qualify as a designated class of investor or lender.
Being a designated class means that brokerages are not required to provide certain disclosures to qualified investors and lenders during mortgage transactions.
However, assuming this status without verifying it can put both your business and your clients at risk.
Read on to learn more about your disclosure responsibilities and how to remain compliant.
Context
Some MICs and MIEs are highly sophisticated, which may make it tempting to assume they are qualified as a designated class.
An investor or lender qualified as a designated class typically has the expertise to assess whether an investment is suitable for them, meaning they do not require the same level of disclosure as a typical investor or lender.
However, there are specific criteria to meet designated class status, and you must confirm that your business partner satisfies these requirements.
Verifying status is a crucial part of your due diligence: it protects your business while enabling investors and lenders to make informed decisions.
Even when an investor or lender qualifies as a designated class, brokerages are still required to conduct a product suitability assessment in most scenarios.[1]
What are the risks?
Incorrectly assuming an investor’s or lender’s status may lead you to omit required disclosures. This is a contravention under the Mortgage Brokerages, Lenders and Administrators Act, 2006 (MBLAA) and exposes your business to potential legal action if the investor or lender believes they would have made a different investment decision had they received all necessary information.
How do I stay compliant?
- confirm the status of each investor and lender, particularly individuals and smaller firms
- for example, verify income or asset levels specified by regulation by reviewing financial statements or other relevant documents, which sophisticated investors may make available online or upon request
- document your verification process, including how you concluded that the investor or lender qualifies as a designated class
Remember, being allowed to skip certain disclosures does not mean you must or even should. In fact, many brokerages choose to provide Form 1s to all investors and lenders, regardless of status, as a best practice.
[1] A suitability assessment is not required for an investor or lender: (1) when the investor or lender is another brokerage or financial institutions or (2) for an NQSMI where an investor or lender is a permitted client entity (permitted client individuals must consent in writing)