CEO and Superintendent of Financial Services
Financial Services Commission of Ontario
Independent Mortgage Brokers Association of Ontario (IMBA)
Annual Conference and Tradeshow
Paramount Conference and Event Venue, Vaughan
April 20, 2012, 9:45 a.m.
I’m glad to have a chance to speak to you today.
A constructive working relationship has evolved between FSCO and IMBA members in recent years, which has served us well in a time of major change in the mortgage brokering sector.
While our views are sometimes different, the work that IMBA does on behalf of its members is aligned with key government objectives for the mortgage brokering sector: Increasing client protection and enhancing professionalism.
This gives the mortgage broker channel a strong foundation to move forward and take advantage of opportunities offered in our economy. At the same time there are significant shifts underway in the financial services industries around the world.
These include increased regulatory focus in the wake of the 2008 financial crisis, as well as an increasing regulatory focus on market conduct issues by financial market supervisory authorities.
Consumers’ expectations are also evolving around expected value and outcomes in their dealings with financial services intermediaries and institutions. And they’re taking full advantage of tools such as social media to hold individuals, companies and governments to account when they don’t receive them.
These trends mean we all have to step up our game.
So why are these changes in the financial services landscape important to you?
They’re important because just as governments around the world are taking part in a broad re-assessment of financial services regulation, here in Ontario, the government and FSCO are continually evaluating how the public interest can be better served in the mortgage brokering sector.
They’re important because the media, economists, and politicians are increasingly focused on the Canadian housing and mortgage markets.
And they’re important to you because it is in this environment that the mortgage broker channel is seeking to retain and increase its market share and demonstrate its value proposition.
Today I would like comment on how the current environment – and our focus on consumer protection – is relevant to your business. Specifically, I’d like to address three key aspects of putting clients’ interests first:
- Complying with the law;
- Recognizing the importance of product suitability; and
- Ensuring appropriate skill sets in your brokerages.
1. Complying with the law
The Mortgage Brokerages, Lenders and Administrators Act (the Act) was brought in to better protect consumers, lenders and investors and to enhance professionalism in the mortgage brokering industry. In the decade prior to the Act coming into force, the broker channel became a significant player in the mortgage market.
We have come a long way since the Act came into force in 2008. Now we are well on the way to where we want to be.
Regulatory compliance in the mortgage brokering sector has significantly improved. FSCO’s most recent compliance reviews of mortgage administrators and brokerages found that the majority had the required policies and procedures in place, and that overall, these policies and procedures were of a much higher quality than a few years ago.
In addition, the compliance rate for errors and omissions insurance has increased from 70 per cent to 94 per cent over the past two years.
These are big improvements from 2009, when FSCO identified many high risk issues in the industry and found that some brokers seemed to be more focused on finding ways around the rules than on putting clients’ interests first.
In my view, your reputation significantly benefits from higher levels of compliance. And it will continue to benefit the closer that you get to achieving compliance levels that are comparable to those of the other sectors regulated by FSCO.
2. Recognizing the Importance of Product Suitability
Your reputation has also benefited from an opportunity to enhance your value proposition as a result of the requirements under the Act to help consumers and investors make informed decisions about mortgage transactions.
One key change was that private lenders who are not licensed by FSCO and who lend their own money on the security of real estate must use a licensed mortgage brokerage. This change introduced much-needed protection for unsophisticated investors and private lenders and created another opportunity for you to demonstrate the value of the mortgage broker channel.
The duty to ensure product suitability under the Act requires you to take reasonable steps to present a suitable mortgage product to clients. It’s intended to ensure that clients can make informed decisions.
If you’re concerned about suitability and reasonability, take some comfort from the fact that the same legal standard applies for all financial services intermediaries, including those in the insurance and securities industries.
I’m aware that there is still debate in the industry – and amongst IMBA members – on the merit of the suitability requirements, probably ranging from those preferring more precisely defined benefits to those wanting to see them removed.
I’m also aware that while some of you see yourselves as offering an objective, advice-based service, others view yourselves as functioning as pure intermediaries.
While it’s healthy for all professions to look for ways to define their role to remain relevant and effective in the marketplace, it’s important for you to keep the current financial services environment and regulatory climate top of mind.
The trend in financial services is for all professionals to take a broader view of their role.
In many sectors, including insurance and securities, financial services intermediaries are moving away from a purely transactional role and are looking at ways that they can add more value to their customers – specifically, by giving advice and counselling tailored to their customers’ circumstances.
Anecdotal feedback also suggests that many consumers and unsophisticated investors still do not have a clear understanding of what mortgage brokers do.
I’m sure you’d agree that it’s important that all clients know what specific services they can expect from you. This is precisely why developing a clear consensus on your value proposition will be beneficial and more importantly profitable to you longer term.
Recent developments also suggest that some banks are questioning the value of your services. I’m referring to decisions by some banks to abandon the mortgage broker channel and bring their mortgage lending activities back in house.
As you work towards achieving more clarity as a profession on your value proposition, I would also encourage you to keep in mind government concerns about the state of the Canadian housing market and the level of household debt.
Canada’s housing sector avoided the subprime mortgage crisis in part because of our regulatory infrastructure. But many policymakers are worried that consumers are taking on more debt than they can handle – and a recent announcement by the Office of the Superintendent of Financial Institutions (OFSI) suggests they are prepared to take action on this issue.
A Draft Guideline released last month by OFSI on sound business and financial practices in underwriting residential mortgages by federally regulated financial institutions reflects this concern.
The Draft Guideline reinforces the obligations of a lender to ensure borrowers have the capacity to meet their debt obligations. As you know, Ontario brokers and agents have very similar obligations.
The Draft Guideline underscores the need to focus on the suitability requirement. My advice: Make it a priority and apply it rigorously.
3. Having the Right Knowledge and Expertise Within Your Brokerage
To comply with the law and apply the suitability requirement, you need to ensure the right balance of knowledge and expertise within your brokerage.
Your reputation is on the line if you are relying solely on the ability to sell – and if you have others selling on behalf of your brokerage, the risks are even higher.
A bad hire or an employee without adequate training could jeopardize the financial well-being of your clients – and in cases where there is serious fallout, pose reputational risks not only for your business, but for your entire channel.
FSCO staff pay attention to what is being said in the marketplace, and many of the conversations taking place there suggest that:
- Some principal brokers may value the quantity of agents over their quality; and
- New mortgage agents may not be receiving enough training from brokerages.
Consider some of the comments that industry professionals recently made online on a recent Canadian Mortgage Professional article that addressed these issues:
- “The brokerage mindset and business model is about hiring as many warm bodies as possible…leave it to the agents to fend for themselves.
- “I once had an associate approach me and our brokerage as she was unable to submit with her current brokerage due to all lenders cutting her off for fraud deals…This person was brought on by another brokerage here. What does this say about our industry and more importantly, what does this say about that brokerage?”
- “Think about how much a brokerage loses when a person does not know how to close a mortgage with a borrower and lender due to ignorance alone.”
While these comments come from a mix of industry professionals across Canada, they nonetheless tap into key issues that have a direct impact on the market share of the broker channel.
While it’s not FSCO’s place to tell principal brokers who to hire, we do encourage you to have a selection process in place that puts clients’ interests first.
By law, you must, of course, screen all of your brokers and agents and ensure they are suitable for licensing. But if someone is new to the business, it’s also in your best interest – and that of your clients – to verify that the individual has demonstrated experience and skills that are transferable to mortgage brokering.
It’s also important for you to ensure your brokers and agents have a good understanding of their requirements under the law as well as the way your brokerage conducts business.
While FSCO’s Re-licensing Education is designed to ensure that mortgage brokering professionals understand their legal obligations, brokers and agents need ongoing training to remain up-to-date on internal procedures and product offerings. For this reason, FSCO encourages all brokerages to have a regular education and training program in place.
Providing this type of ongoing training makes good business sense. Your clients benefit. Your business benefits. And the reputation of your industry benefits.
Ontario’s broker channel has come a long way over the past five years. You’ve made great strides when it comes to compliance. And you’ve considerably enhanced professionalism in the industry.
The mortgage market is a challenging place to do business right now. And if banks continue to shift away from reliance on the broker channel, it’s only going to get tougher. Enhancing your industry’s reputation and credibility require more work now than ever before.
Today, I’ve highlighted how putting clients’ interest first means:
- Complying with the law;
- Focusing on suitability; and
- Ensuring and maintaining appropriate skill sets in your brokerage.
Embrace all three and you can’t but help enhance your reputation and increase your sector’s credibility with consumers.
However, to be recognized as a channel of choice by consumers you need to go a step further: You must be willing to take a broader view of your role as an intermediary and achieve consensus on the value proposition you have to offer consumers.
In closing, I’d like to stress that enhancing the reputation of the mortgage broker channel is something that ultimately falls to each of you, as individual brokers and agents. The way that you service your clients on a day-to-day basis speaks volumes about your sector – and it does more to shape your future in the marketplace than any public awareness campaign.
Put your clients interests’ first, and success will follow.