FSRA will engage more closely with large brokerages to ensure they are protecting consumers by effectively supervising agents and brokers. FSRA is taking this step following recent reviews that found overall inadequacies in brokerages’ supervision and compliance controls.
Background
One of our supervision priorities for 2023-2024 focused on reviewing large brokerages because they have the greatest impact on Ontarians – they employ the most agents and brokers and serve the most consumers.
Our review assessed whether brokerages and principal brokers have implemented effective supervision and control processes that ensure their authorized agents and brokers conduct business with competence, with client’s interests in mind, and stay compliant with MBLAA and FSRA’s rules.
Specifically, we assessed whether large brokerages’ supervision and control processes are designed to achieve the consumer protection outcomes of treating clients fairly and ensuring they receive product recommendations that are suitable for their individual needs and circumstances. We also reviewed a sample of private mortgage transactions to assess whether the supervision and control processes were effective in ensuring the conduct of their agents/brokers aligns with the consumer protection outcomes for those products.
Findings
Our reviews demonstrated similar deficiencies across brokerages in varying degrees, which, when taken together, indicate an overall inadequacy in supervision and internal compliance controls.
Although observed at all brokerages, deficiencies varied in their type, frequency and impact. For the purpose of this article, we present these deficiencies as a general summary across brokerages.
The most common supervision weaknesses related to how principal brokers were monitoring and assessing the effectiveness of their controls – particularly those focused on mortgage product suitability and ensuring complete and accurate disclosures to borrowers.
Additionally, certain exams revealed weak hiring and onboarding processes and insufficient monitoring of concurrent businesses of agents/brokers to assess and manage conflict of interest risks. Although the large brokerages we examined demonstrated some compliance controls, we found weaknesses in their risk assessment processes.
More specifically, weaknesses centered on processes for identifying and supervising activities or licensed individuals who pose higher conduct risks, such as dealing in private mortgages and high revenue generating agents/brokers or large teams.
As indicated in the proposed guidance on brokerage and principal broker responsibilities, supervision and internal control processes should be appropriately scaled to the brokerage’s size and business model. Controls and processes should be designed with these key points in mind:
- Compliance oversight and internal controls should ensure that any file-level review process emphasizes substance over form (e.g., examines whether the contents of a document achieve the intended outcome, not just whether a document is present in the file).
- Brokerages should ensure that appropriate recruitment, on-boarding, and training are in place for all new agents and brokers.
- Compliance responsibilities may be delegated but those delegations must be clearly outlined, consistent and adequately monitored by the principal broker.
- Compensation arrangements should be structured such that they do not incentivize non-compliance.
- Principal brokers and brokerages should have policies in place to require the disclosure and ongoing monitoring of concurrent business and other activities undertaken by its agents and brokers to ensure these activities are not in conflict with the agent’s/broker’s mortgage brokering activities authorized by the brokerage.
Next steps
Because of their market share and consumer impact, monitoring large brokerages will remain a key supervision priority for us over the 2024-2025 period. As such, we will intensify our engagement with large brokerages to ensure supervision and compliance expectations are understood and being met, and gaps are addressed as needed.
FSRA will host its inaugural mortgage brokering sector Principal Brokers’ Conference in November 2024 as a means of intensifying outreach to principal brokers, directors, officers, and owners of brokerages, to help educate the sector about FSRA’s expectations regarding the role of principal brokers and brokerages in supporting a strong conduct culture. Keep your eyes open for the announcement and “save-the-date” email.