- Prior to July 1, 2021, in Ontario, Qualified Syndicated Mortgage Investments (“QSMIs”) and Non-Qualified Syndicated Mortgage Investments (“NQSMIs”) were regulated by the Financial Services Regulatory Authority of Ontario (“FSRA”) under the Mortgage Brokerages, Lenders and Administrators Act, 2006 (“MBLAA”) and its Regulations.
- In other provinces (British Columbia, Alberta, Saskatchewan, Manitoba, Quebec and New Brunswick), SMIs are considered to be securities and are regulated under their securities legislation.
- Effective July 1, 2021, regulation of NQSMI transactions will be split between the Ontario Securities Commission (“OSC”) and FSRA.
- The two key elements for determining the division of oversight over NQSMI transactions are:
- Whether the investors/lenders are Permitted or non-Permitted Clients; and
- Whether the borrower is a Permitted or non-Permitted Client.
- More specifically:
- FSRA will regulate transactions with investors/lenders who are Permitted Clients.
- OSC will regulate transactions with Non-Permitted investors/lenders
- FSRA will regulate transactions with non-Permitted and Permitted Client borrowers, although the OSC may regulate transactions with Permitted Client borrowers in a NQSMI
- This new framework also applies to renewals of NQSMIs originated before July 1, 2021 (Legacy NQSMIs), which will be considered new NQSMI transactions.
Please refer to FSRA Guidance on the Supervision Approach for Non-Qualified Syndicated Mortgage Investments with Permitted Clients and Legacy Non-Qualified Syndicated Mortgage Investments (MB0041APP) effective July 1, 2021 for more information.
- FSRA will follow up with brokerages that transact in mortgage investment structures that pose similar risks as NQSMIs to investors/lenders. Such investment structures include those that involve multiple mortgages with similar terms but different amounts with different lenders to provide funding for a single purpose (e.g., construction or soft costs of a real estate development project). These are often referred to as “Tandem mortgages”[1].
- FSRA will ask for further information, at a minimum, about:
- How the transaction was underwritten
- How the investment was marketed and sold
- FSRA reminds brokerages and administrators that they must meet their respective obligations regarding disclosures to and suitability assessment (as applicable) for investors/lenders and borrowers under the MBLAA and its Regulations.
[1] These are called Participation Mortgages in the United States.
- FSRA has implemented licence exemptions that would reduce overlapping oversight on the same transaction, reducing burden on mortgage brokerages.
- With these exemptions, the regulatory oversight of NQSMIs effective July 1, 2021 is as follows:
- Dealing or trading in NQSMIs with Permitted Client investors/lenders can be overseen by FSRA or the OSC.
- Dealing or trading in NQSMIs with non-Permitted Client investors/lenders is primarily overseen by the OSC.
- Dealing or trading in NQSMIs with both Permitted and non-Permitted Client investors/lenders can be overseen jointly by FSRA and the OSC or by the OSC only, in accordance with their respective regulatory regimes.
- When dealing or trading in NQSMIs, a dealer registered with the OSC can deal or trade with borrowers who are Permitted Clients.
- The table below summarizes the information above:
|
Borrowers in NQSMIs |
||
Permitted Client |
Non-Permitted Client |
||
Investors/Lenders |
Permitted Client |
FSRA Licence |
FSRA Licence (to deal with borrower) |
Non-Permitted Client |
OSC Registration and FSRA Licence Exemption |
OSC Registration |
- FSRA noted, in recent NQSMI cases, that investors/lenders who met the definition of designated class investors/lenders and invested in NQSMIs were materially impacted when they lost money in some projects.
- The threshold to qualify as a “Permitted Client” is higher than that to qualify as a designated class investor/lender.
- A Permitted Client is defined in subsection 1(1) of Ontario Regulation 188/08. The definition lists several types of Permitted Clients, which are entities and individuals that are presumed to have significant experience and knowledge regarding financial matters, including investments, and robust financial means.
- The definition of a Permitted Client is similar to the one used in the Canadian Securities Administrators’ National Instrument 31-103 (Registration Requirements, Exemptions and Ongoing Registrant Obligations) for consistency across regimes.
- FSRA Forms 3.0, 3.1 and 3.2 are no longer required for NQSMI transactions on and after July 1, 2021. However, mortgage brokerages must still provide the disclosures required by the MBLAA. The format of the disclosures is not prescribed.
- This applies to NQSMI transactions falling under the oversight of FSRA. Please contact the OSC for more information about the filing requirements applicable to transactions falling under the securities regime on and after July 1, 2021.
- For renewals of Legacy NQSMI transactions (NQSMI mortgages originated before July 1, 2021) with Permitted Client investors/lenders, FSRA Forms 3.0, 3.1 and 3.2 are also no longer required.
- Mortgage brokerages transacting in NQSMIs with Permitted Client investor/lenders on or after July 1, 2021 must submit NQSMI data
- Effective from the reporting period starting January 1, 2022, FSRA requires annual reporting of the data as part of the brokerage’s Annual Information Return (AIR). The AIR must be filed by March 31 every year, with data related to the previous calendar year.
- NQSMI information was previously collected via a separate quarterly NQSMI report. This quarterly report is no longer required. The questions in the quarterly report have been incorporated into the AIR questionnaire.
- For legacy NQSMI transactions that are not yet paid out, FSRA will collect information through the AIR, and may conduct periodic surveys and reviews to understand the status and recoverability of the applicable NQSMIs and evaluate potential risk to investors.
- The table below summarizes the information:
Parties |
Will you be affected? |
---|---|
Lenders |
Yes, if you meet the definition of Permitted Clients:
Yes, if you meet the definition of Non-Permitted Clients:
|
Borrowers |
Yes, more specifically:
|
Mortgage Brokerages |
Yes, if you deal or trade in NQSMIs with non-Permitted Clients:
|
Mortgage Administrators |
No. there is no change in the oversight for mortgage administration on and after July 1, 2021. |
- Mortgage brokerages must establish policies and procedures for confirming investor/lender status. They must take reasonable steps to confirm the Permitted Client status and class of investors/lenders. These steps must include:
- Documenting the steps taken to confirm investor/lender status; and
- Obtaining signed confirmation of Permitted Client status from the investor/lender.
- There is no recommended frequency for confirming the status of Permitted Client investors/lenders. However, FSRA expects that mortgage brokerages have reasonable policies and procedures to ensure that they are only dealing with Permitted Clients in each NQSMI transaction.
- The change in the regulatory oversight of NQSMIs in Ontario is to ensure a higher level of consumer protection and alignment with how SMIs are regulated in other provinces in Canada.
- The entity and individuals that you are dealing with are responsible to ensure that they have the appropriate licensing and/or registration for transacting NQSMIs on your behalf.
- If you are a non-Permitted Client investor/lender looking to invest in a NQSMI on and after July 1, 2021, the entity acting on your behalf is required to be registered as a dealer with the OSC (e.g., Exempt Market Dealer (“EMD”)).
- If you are a Permitted Client investor/lender or borrower in a NQSMI on or after July 1, 2021, the entity you are dealing with can be licensed with FSRA as a mortgage brokerage or registered as a dealer with the OSC.
- If you are a non-Permitted Client borrower looking to borrow through a NQSMI on and after July 1, 2021, the entity acting on your behalf is required to be licensed as a Mortgage Brokerage with FSRA.
- Please email our Contact Centre at [email protected] for more information.