Regulator ignored red flags on mortgage investments

Regulator ignored red flags on mortgage investments

Regulator ignored red flags on mortgage investments As the Canada Revenue Agency (CRA) takes fire for reported failures in oversight and public service, another agency faces questions over how it did its job — or neglected to do so.

From 2011 to 2015, the Financial Services Commission of Ontario got reports of a troubling trend: investors were being convinced to put money into syndicated mortgages, investment products that were ill-suited or too risky for the retail market. But according to Reuters, investigators at the agency didn’t act on the complaints and warnings.

Typically, syndicated mortgages pool investors’ money to fund speculative construction projects, such as condominiums and retirement communities, that can’t be supported just by bank lending. That makes them high-risk and mostly suited for accredited investors.

Unfortunately, that wasn’t disclosed to many retail investors who were convinced to include those products in their RRSPs. Left hungry by historically low interest rates, they were told they could profit from Ontario’s real-estate market, which was running red-hot at the time. One company, Fortress Real Developments, was a recurring name in the complaints; the typical Fortress product reportedly had an investor putting up a principal loan ranging from $30,000 to $100,000 for two to five years, over which time 8% interest is paid regularly.

In its review of FSCO documents, Reuters found accounts of investors not being told about numerous risks and caveats, including the possibility of losing their principal if a project failed; the fact that often-advertised returns of 8% aren’t guaranteed; and that a 35% cut would have to go to the brokers and Fortress.

Such fine-print terms have cost the public dearly. Citing unnamed regulatory sources, Reuters said more than 20,000 retail investors, mostly in Ontario, have poured as much as $1.5 billion into syndicated mortgages over the past 10 years. Roughly 90% of those investments have reportedly lost money or risk doing so; Fortress projects account for more than half of the investments.

The news outlet reported that the FSCO didn’t just overlook the problem; senior investigators reportedly snubbed or downplayed warnings from their own compliance officers, as well as other regulatory agencies. Some investigations were launched, but closed without any action being taken.

According to former and current staff at the agency, the investigators — most of whom were former police officers — lacked the skills and knowledge required to look into the complaints and were discouraged by senior regulators from addressing complex cases.

Other agencies have decided to step in. In April, Ontario’s Ministry of Finance announced plans to move the responsibility of regulating syndicated mortgages from the FSCO to the Ontario Securities Commission (OSC). However, two unnamed sources familiar with regulatory matters said the transfer could take two years.

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