Responding to an open consultation, the group stressed the need for strong regulation on sales, advertising, and marketing
An investor group has seized the opportunity to make recommendations on how to protect Ontarians from risks represented by syndicated mortgage loans.
Earlier this month, the Financial Services Regulatory Authority (FSRA) of Ontario opened a public consultation, which will end on September 6, on a proposed risk-based supervision approach and new supplemental disclosure form for high-risk syndicated mortgage investments.
Based on an analysis of 246 syndicated mortgage transactions completed over the past few years, the regulator identified three key “red flags” of potential harm to retail investors:
- High loan-to-value ratios (greater than 100%);
- Presence of a subordination clause; and
- Conflicts of interest (where the borrower or developer is related to the mortgage administrator).
For syndicated mortgage transactions featuring at least one of the key risk indicators, the FSRA will require brokerages to provide retail investors with an additional summary disclosure. That proposed Form 3.2.1 aims to provide investors with a clear warning that the investment is risky, outline specific risks in high-leverage mortgage securities, and summarize fees payable to brokerages, brokers, agents, or any related parties for the high-risk syndicated mortgage investment.
Kenmar Associates, an investor advocacy group, is skeptical of the measure’s effectivity. Citing high-profile cases such as the Fortress Real affair, the group recommended that such investment products not be sold at all to retail investors in Ontario.
“The monumental burden on the FSRA, retail investors, government finances and the Ontario economy when these products fail is simply not justifiable,” the group said in its submission.
Should the FSRA decide to allow such high-risk products, Kenmar said, there should be robust, enforceable rules to regulate marketing, advertising, and sales practices. It also stressed the need for plain language in offering documents, as well as background checks of the principals behind the offerings.
While the group was doubtful of the new disclosure form’s effectivity, it maintained that the form should be independently assessed by behavioural finance experts before being put to use. “The completed forms should be retained for 7 years which we understand is a common retention period for such documents,” the group said.
Kenmar also maintained that brokers/salespersons selling such investments should be required to use risk profiling tools and other KYC information to determine whether they are appropriate for clients. Advertisements and other information on new syndicated mortgage deals that appear in ethnic media, trade shows, or the radio, the group added, should be monitored by the FSRA for accuracy, compliance, and quality. Noting that syndicated mortgages are clearly an investment product, the group called for the Ombudsman for Banking Service and Investments (OBSI) to be the sole recognized ombudsman service for complaints related to those products.
As a final recommendation, the group called for the establishment of an investor protection insurance fund, financed by fees charged to mortgage brokers, from which investors harmed by fraudulent mortgage deals could get compensation.