Why is FSRA interested?
The Principal Broker’s ultimate duty is to supervise the business conduct of the brokerage’s licensees to ensure compliance, including fair treatment of consumers. As brokerages evolve, FSRA is concerned that they may not have adequate resources to ensure their brokers and agents are complying with regulatory requirements and putting an adequate focus on their customers’ needs and circumstances.
The supervisory role of the Principal Broker is highlighted in the Mortgage Brokerages, Lenders and Administrators Act, 2006 (“MBLAA” or “the Act”) and its regulations. Most specifically, O. Reg. 410/07: Principal Brokers: Eligibility, Powers and Duties, section 2 clearly articulates that the Principal Broker is responsible for ensuring the compliance of each broker and agent authorized (licensed) under the brokerage. In addition, section 3(1) establishes that the Principal Broker is required to ensure that the brokerage’s policies and procedures are designed to ensure that all brokerage licensees (a) comply with all requirements established by the Act and regulations, and (b) are adequately supervised.
The Principal Broker must take reasonable steps to ensure that the brokerage and all of its licensees comply with the Act and regulations and that all licensees are adequately supervised. Principal Brokers play a key role in promoting good conduct and deterring deceptive or fraudulent conduct within the sector, therefore contributing to public confidence in the mortgage brokering industry.
What we did and how we did it
With such an important role to play, and with such varying brokerage staffing and business models in the industry, FSRA set out to better understand the approaches to supervision and compliance within each brokerage. In November 2020, FSRA sent Principal Brokers of 1202 licensed brokerages a comprehensive questionnaire to gather information about their supervisory approaches, oversight, authority and resources. Eighty-one per cent of Principal Brokers responded. The questionnaire included questions about the brokerage organizational structure, how compliance resources are used, compliance activities performed, and the role and authority of the Principal Broker.
What we found
We continue to analyze the responses and assess them based on the context of the brokerage size, business model, products offered, operational structure, and volume. Preliminary analysis shows commonalities across all brokerage sizes and business models1.
Independence and Decision-Making
The mortgage brokering industry is fast-paced and requires versatility and swift decision-making. When Principal Brokers have the authority within the brokerage to make decisions, adapt practices and refine policies and procedures as required, they can focus their efforts on the business at hand rather than waiting for multiple layers of approval. Depending on the size and scope of the business, the independence and authority of the Principal Broker can vary. Ultimately, a Principal Broker with the appropriate authority and independence can be more effective in carrying out their responsibilities of managing compliance and supporting brokers and agents.
- Roughly 90% of Principal Brokers indicated that they were either the brokerage owner or (one of) the main decision-makers for the business.
- Just over 61% of Principal Brokers indicated that they were solely responsible for oversight of the performance and earnings of the brokerage, without reporting required to another party (e.g., Board of Directors, CEO/President, franchisor, etc.).
- 86% of respondents indicated that they are able to carry out their Principal Broker responsibilities independently, without requiring approval from the business.
- 97% responded that they have the right to follow up on actions taken by management to address issues identified.
- Nearly 98% indicated that their brokerage’s organizational structure allows them to make decisions that affect the brokerage.
- Just over 99% of Principal Brokers responded that they were able to freely assess and opine on the adequacy of controls, processes, and regulatory compliance at the brokerage
- Nearly 63% of Principal Brokers, however, indicated that their compliance department was not independent of the sales side of the business.
Compliance & Supervision
One of the most important duties of the Principal Broker is to ensure the compliant business conduct of all brokers and agents licensed under the brokerage. Principal Brokers who are directly involved in the daily operations of the brokerage can see compliance, or non-compliance, in real time. As a brokerage evolves – whether it be by adding more brokers/agents, new business and referral relationships, or new products, the compliance resources and expertise of the brokerage should adapt accordingly.
- 91% of Principal Brokers indicated that their compliance mandate was clearly articulated (e.g., within their job description), and has been clearly communicated within the brokerage among management and brokers/agents.
- 86% of respondents indicated that their brokerage’s compliance department was fairly small, consisting solely of the Principal Broker (59%), or the Principal Broker with one or two additional staff (27%).
- Despite such a large number of brokerages reporting very small compliance departments (often consisting of just the Principal Broker), 87% of Principal Brokers indicate that compliance reviews are completed on a regular basis within the brokerage.
- Of these 87%, almost 90% indicate that they have incorporated their compliance practices directly into the flow of business, e.g., forms and/or checklists to be used in conjunction with applications, and to support and document the steps that were taken by the broker/agent.
The table below breaks down how, on average, a Principal Broker’s time is spent. We see that the average Principal Broker is spending a little over one-third of their time on compliance-focused activities, which include:
- Ensuring brokerage compliance with regulations – 13%
- Supporting brokers/agents with their mortgage transactions – 10%
- Training brokers/agents – 8%
- Liaising with regulatory bodies – 4%
- Compliant handling and resolution – 2%
The remaining time is split between brokering of the Principal Broker’s own files, personnel management, and functional administration for the brokerage.
The MBLAA and its regulations establish the importance of the Principal Broker as the main person responsible for the compliant conduct of every broker and agent authorized by the brokerage. As such, it is not surprising to see that 90% of Principal Brokers indicated that they have put a compliance program in place at their brokerage. This includes regular site visits to offices for the approximately 72% of Principal Brokers whose brokerages have one or more offices open to the public.
When conducting compliance reviews, including office site visits, Principal Brokers indicate the following key elements that are reviewed, as shown in Figure 2.
How will FSRA use this information?
As noted above, we continue our analysis of the Principal Broker Supervision Questionnaire responses. In particular, we are reviewing the free-form text entry fields in which respondents provided additional descriptions of their operations and approaches to supervision and compliance.
With 86% of Principal Brokers indicating that the compliance resources at their brokerage consist of either the Principal Broker alone, or assisted by one or two additional staff, we are working to identify best practices for brokerages of different size and complexity and further opportunities to support Principal Brokers and to improve supervision effectiveness. We expect to share guidance with the industry within the next 12 months.
What this means for you
Ensuring that the brokerage and its brokers/agents conduct business in a fair and compliant manner is everyone’s responsibility.
If you are a Principal Broker or a key compliance resource at your brokerage, consider your brokerage’s approach to ensuring that broker/agent business conduct is supervised for compliance with the Act and its regulations.
- What supervision practices have we put in place?
- Are we fostering a culture of compliance?
If you are a broker/agent, take a moment to reflect on how the brokerage’s compliance program protects you by ensuring your business activity is compliant.
- Have I built compliance into my sales process?
- What steps do I take to ensure that I’m fulfilling my obligations in every transaction?