MFDA aims to clarify sales rules

The aim of the bulletins is to inform MFDA members that any approved person who also is a licensed mortgage broker must conduct such business through a mutual fund dealer.

Before the MFDA was formed in 1998, mutual fund-approved advisors who were dually licensed as mortgage brokers did not have to meet such a requirement. However, with the creation of the MFDA and Rule 1.1.1, approved advisors must conduct all business through a dealer – something that many advisors and their dealers still may not realize 17 years later.

“That distinction may not have been really clear to members or their approved persons,” says Karen McGuinness, senior vice president, member regulation, compliance, with the MFDA.

The fact that advisors may be “selling away” or entering into referral arrangements with mortgage brokers is a concern for the MFDA, a self-regulatory organization (SRO), because sales or referrals of investment products – not just syndicated mortgages – conducted outside of a dealer firm have resulted in the most significant cases of client harm in the MFDA’s enforcement action, McGuinness says.

In Ontario, syndicated mortgages fall under the Securities Act’s exemption from dealer registration and prospectuses. However, to offer or solicit transactions in such products, an individual must be licensed under the Mortgage Brokers, Lenders and Administrators Act (MBLAA) and monitored by FSCO.

A “syndicated” mortgage is a mortgage, held by two or more private investors, on a residential or commercial property and with returns negotiated by the mortgage’s participants. For example, a syndicated mortgage could be two people lending money to a third to purchase a house, or could be hundreds of individuals investing in a large project, such as a condominium.

Mortgage transactions in Ontario totalled roughly $100 billion in 2013, with the syndicated mortgage market accounting for approximately $4 billion of that.

“Syndicated mortgages are a growing part – albeit a small part – of a mortgage-brokering business,” says Anatol Monid, executive director, licensing and market conduct division, with FSCO. “As consumers and investors search for yield, [these investments] provide an opportunity for higher yield.”

Client interest in companies offering syndicated mortgages began to grow around the year 2000 and has increased since 2008. In 2009, the syndicated mortgage market was approximately $1.5 billion in Ontario.

For licensed, MFDA-approved advisors, being a licensed mortgage broker is not enough to meet the SRO’s rules. The advisor’s dealer also must be licensed under the MBLAA as a mortgage brokerage. “It’s kind of one or the other,” says McGuinness. “It’s either all in or all out.”

Furthermore, even if a dealer and its approved advisors are licensed mortgage brokers, both levels still can expect the MFDA – and FSCO, for that matter – to pay close attention to the clients who purchase such products.

“We’re absolutely looking at suitability,” says McGuinness, who adds that the MFDA’s and FSCO’s rules are complementary; thus, by abiding by one set of rules, advisors and dealers would meet the requirements of the other.

Advisors who make a referral for syndicated mortgages may find themselves in hot water with the MFDA for reasons other than conducting business outside their dealers. Under the MBLAA, individuals can make what is known as a “simple referral,” whereby the individual passes along a client’s contact information. But, in reality, making such a referral is almost impossible without discussing the product and providing some form of advice, which then triggers MFDA Rule 1.1.1, McGuinness says: “[Such a referral] is not going to work under our rules.”

Further complicating matters in such a situation is that most clients don’t realize that the person they’re buying the syndicated mortgage from is different from the person who originally referred the client.

McGuinness also says the MFDA has discussed syndicated mortgages in relation to Rule 1.1.1 at its member regulation forums. The SRO also will continue to look for instances of “selling away” during regular reviews.

Reporting requirements for advisors in other channels who conduct mortgage-related business can vary, depending upon the regulator. For example, managing general agencies (MGAs) have the responsibility to decide whether their dual-licensed insurance advisors must inform the MGA of such business and licences.

Meanwhile, advisors who are licensed with the Toronto-based Investment Industry Regulatory Organization of Canada (IIROC) are required to report syndicated mortgage business in accordance with that SRO’s “outside business activities” rules. An email sent to Investment Executive by IIROC says: “To date, we have seen very limited sales of these types of products on our platform, but we are continuing to monitor [the sale of such products].”

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