The purpose of the NQSMI Investor Class Determination (NQSMI-ICD) Project was to assess the mortgage brokering industry’s understanding and compliance with FSRA’s NQSMI Supervision Framework. We found the sector needs to better understand compliance requirements when working with NQSMIs.
In Phase 1, FSRA selected 46 mortgage brokerages and reviewed the adequacy of their written policies and procedures. Most brokerages reported taking adequate steps to confirm investors’ class. But over half did not have these steps properly documented in their policies and procedures manual.
In Phase 2, FSRA risk-assessed and selected 8 of 46 brokerages to conduct spot checks and review transaction files. We sought to determine whether brokerages had implemented the practices and changes required from Phase 1 findings.
We also assessed to ensure FSRA licensees are not dealing with non-permitted investors in NQSMIs if they do not have the required registration under the securities regime.
In Phase 2, FSRA conducted the following:
- Policies and Procedures Reviews: Confirming brokerages have made the requested updates to their policies and procedures for NQSMI Permitted Client determination
- File Reviews: Reviewing brokerages' investor class determination procedures demonstrated on thirty-two (32) different investors
Policies and procedures reviews
The updated policies and procedures’ excerpts revealed adoption of some of FSRA’s expected processes for Permitted Client determination which are:
- using a signed attestation from clients confirming their status as Permitted Client
- using a “know your client” (KYC) form or similar document to collect information about a client to assess their status
- obtaining third-party supporting documentation to validate Permitted Client status
- monitoring Permitted Client status at the time of mortgage extension/renewal
Seven of the eight brokerages have adopted signed attestation and KYC forms. However, no brokerage adopted all the above processes.
- 6 of 8 brokerages (75%) used a signed attestation
- 5 of 8 brokerages (62.5%) used a KYC form or similar document to collect information about a client’s status
- 5 of 8 brokerages (62.5%) obtained third-party documentation to validate Permitted Client status
- 1 of 4 brokerages which have arranged a mortgage extension or renewal (25%) monitored Permitted Client status at the time of extension/renewal
Two brokerages received a Letter of Warning following Phase 2 examinations.
FSRA is particularly concerned that brokerages reported implementing policies and procedures which were not observed in our transaction reviews; and that some transactions selected for review were brokered with Non-Permitted Clients; transactions were also not filed with the Ontario Securities Commission (OSC). FSRA referred all such cases to the OSC.
Overall, the industry should better understand:
- permitted Client definition
- division of oversight between FSRA and the OSC related to NQSMIs
- securities law exemptions when working with registered dealers and Non-Permitted Client investors
FSRA will continue consulting and exchanging information with the OSC to ensure brokerages understand and adherence to the new NQSMI framework.
 See section 3.6 (page 62) of the July 27, 2023 OSC Staff Notice 33-755 - Compliance and Registrant Regulation Branch Summary Report for Dealers, Advisers and Investment Fund Managers OSC Staff Notice 33-755 - CRR Branch Summary Report