Decision # 130
Commissioner’s reasons for decision
(Financial Consumer Agency of Canada Act, subsection 23(2))
This decision concerns two violations of the Cost of Borrowing Regulations (the “CBR”).
In March 2017, the Deputy Commissioner of the Financial Consumer Agency of Canada (the “FCAC”) issued a Notice of Violation to [text omitted] (the “bank”) pursuant to subsection 22(2) of the Financial Consumer Agency of Canada Act (the “FCAC Act”).The Notice of Violation states that the Deputy Commissioner has reasonable grounds to believe that the bank committed two violations of the CBR because it failed to provide:
- under paragraph 8(1)(l) of the CBR, for the period from [text omitted] to [text omitted], an accurate disclosure statement that included the information required to be disclosed when entering into a new mortgage agreement; and
- under paragraph 14(1)(a) of the CBR, for the period from [text omitted] to [text omitted], an accurate disclosure statement that included the information required to be disclosed by section 8 of the CBR when renewing certain mortgage agreements.
The Deputy Commissioner proposes the following penalties:
- Violation # 1: $75,000
- Violation # 2: $75,000
The proposed penalties for the two violations therefore amount to $150,000.
In April 2017, the bank sent me its written representations in response to the Notice of Violation issued by the Deputy Commissioner. The bank is not disputing Violation # 1 and undertakes to pay the related penalty. The bank, however, disputes Violation # 2. The bank alleges, among other things, that it should not be held liable by reason of the principle of fundamental justice which precludes the Deputy Commissioner from issuing a Notice of Violation for multiple violations arising out of the same compliance issue.
Having carefully reviewed the file, including the compliance report from March 2017 and the representations filed by the bank, I conclude that, on a balance of probabilities, the bank committed Violations # 1 and 2, as described in the Notice of Violation. The penalties therefore amount to $150,000. What follows are my reasons.
Commissioner’s Guidance CG-9, Mortgage Prepayment Penalty Disclosure (Guidance CG-9), came into effect in March 2013. Guidance CG-9 clarifies the components that must be part of a mortgage prepayment penalty disclosure required under paragraphs 14(1)(a) and 8(1)(l) of the CBR.
In [text omitted], the bank revised its credit agreement for fixed interest rate mortgages for a fixed amount to be repaid on a fixed future date or by instalment payments (the “credit agreement”) to ensure compliance of the wording of the prepayment penalty clause with Guidance CG-9. When it amended the credit agreement, the bank reproduced the wording of the prepayment penalty clause incorrectly. The bank’s error resulted in the penalty calculated by the bank’s computer system and billed to customers making a prepayment on their mortgage being higher than the penalty established using the formula disclosed in the disclosure statement provided to new mortgage borrowers and customers renewing their mortgage.
In January 2015, an employee of the bank discovered these compliance issues. They were reported to the FCAC in March 2015.
In [text omitted], the bank corrects the wording of the clause and confirms that, from this date, the new mortgage loan credit agreement provided to customers is compliant. It remains, however, that certain customers with closed mortgages of up to five years are still in a non-compliant situation.
III. The bank’s representations
The bank undertakes to pay the penalty for Violation # 1.
However, it disputes Violation # 2. It submits that Violations # 1 and 2 arose from the same facts and that, consequently, holding the bank liable for both violations offends the Canadian criminal law rule against allowing multiple convictions for a single violation.
IV. The law
The relevant provisions of the CBR provide as follows:
8 (1) A bank that enters into a credit agreement for a loan for a fixed interest rate for a fixed amount, to be repaid on a fixed future date or by instalment payments, must provide the borrower with an initial disclosure statement that includes the following information:
. . .
(l) the disclosure required by paragraph 452(1)(a) of the [Bank] Act, including a description of any components that comprise a formula to calculate a rebate, charge or penalty in the event that the borrower exercises the right to repay the amount borrowed before the maturity of the loan and, if section 17 applies, the formula set out in subsection 17(4); . . ..
14 (1) If a credit agreement for a loan secured by a mortgage or hypothec is to be renewed on a specified date, the bank must, at least 21 days before the date, provide the borrower with a subsequent disclosure statement that contains the information required to be disclosed by
(a) section 8, if the credit agreement is for a fixed interest rate; . . ..
Violation # 1
A bank that enters into a new credit agreement has to provide the borrower with an initial disclosure statement that includes the information described in paragraph 8(1)(l) of the CBR, namely, a description of any components that comprise a formula to calculate a penalty in the event that the borrower exercises the right to repay the amount borrowed before the maturity of the loan.
In this case, the evidence shows that the disclosure statement provided to borrowers with the credit agreement for new loans does not fulfill the requirements of paragraph 8(1)(l) of the CBR given the errors it includes. Because of these errors, the amount billed to customers does not match the amount obtained when using the formula disclosed in the statement provided to customers.
In its written representations, the bank has undertaken to pay the penalty related to this violation and has not provided any new evidence or explanation for its non-compliance. I therefore conclude that, on a balance of probabilities, the bank contravened paragraph 8(1)(l) of the CBR and committed Violation # 1.
Violation # 2
Under paragraph 14(1)(a) of the CBR, when renewing a credit agreement, a bank has to provide the borrower with a subsequent disclosure statement that includes a description of any components that comprise a formula to calculate a penalty in the event that the borrower exercises the right to repay the amount borrowed before the maturity of the loan.
I am satisfied that the evidence establishes that the disclosure statement provided to borrowers with the loan renewal credit agreement does not fulfill the requirements of paragraph 14(1)(a) of the CBR given the errors it contains. Because of these errors, the amount billed to customers does not match the amount obtained when using the formula disclosed in the statement provided to customers.
The bank, however, submits that it cannot be held liable for two violations in this case. In support of its position, it refers to the principle recognized by the Supreme Court of Canada in Kienapple v. R.Footnote 1
I discussed this principle in my decision dated October 19, 2016.Footnote 2 The reasons in that decision apply here. Firstly, the terminology chosen for subsection 22(1) of the FCAC Act and paragraph 2(a) of the Financial Consumer Agency of Canada Designated Violations Regulations demonstrate Parliament’s intention to authorize the imposition of multiple violations arising from the same compliance issue. Secondly, even though Violations # 1 and 2 arise from an incorrect description of how to calculate the penalty, the facts upon which each violation is based are different. It is well established that the rule precluding multiple convictions does not apply when the convictions relate to different victims.Footnote 3 In that regard, I note paragraph 8(1)(l) of the CBR concerns the disclosure required in the prepayment clause for a new loan, while paragraph 14(1)(a) of the CBR concerns the disclosure required in the prepayment clause for loan renewals. The affected customers are from different groups. Consequently, the principle recognized in Kienapple does not apply here.
In the absence of an explanation for the non-compliance, I conclude, on a balance of probabilities, that the bank contravened the disclosure requirements of paragraph 14(1)(a) of the CBR and committed Violation # 2.
As for the amount of the penalties, I adopt the Deputy Commissioner’s analysis of the criteria in section 20 of the FCAC Act in the Notice of Violation and note as follows:
Degree of intent or negligence
The violations in question raise serious questions about the bank’s compliance practices, including substantial deficiencies in the controls used to verify compliance and identify potential disclosure issues. As a result of its negligence, 18 months went by before the disclosure errors were detected. Control measures should be performed on a regular basis.
Moreover, once the matter was taken on by the bank’s Compliance Department, an additional 12 months were needed to resolve the compliance issues related to new loans and renewals granted after [text omitted]. During this period, the bank did not implement any interim measures to mitigate the problem.
Lastly, when the reimbursement process was implemented, around [text omitted], the bank performed further analyses and detected a coding error that had initially not been taken into consideration. As a result, it discovered that [text omitted] additional customers had also been affected by this error.
I note, however, that the bank reported these violations and was transparent and cooperative throughout the process.
The compliance issues persisted for over 30 months. [Text omitted], Violations # 1 and 2 affected [text omitted] mortgage holders financially and required a reimbursement of $1,380,691.
Moreover, the evidence establishes that in March 2017, [text omitted] customers of [text omitted] mortgages still held loans governed by credit agreements with an incorrect prepayment penalty clause.
In the last five years, the bank has committed seven violations. These violations led to penalties totalling $385,000. This is worrying as the bank does not seem to be learning from its mistakes. Indeed, this is the second time an error has been made in the wording of a disclosure clause. The observations I made in my decision dated October 19, 2016,Footnote 4 do not appear to have incited the bank to implement adequate measures to remedy the control and verification problems.
Considering my analysis of the criteria in section 20 of the FCAC Act and the fact that the bank did not make any representations on the amount of the penalties, I do not find that the $75,000 penalty for Violation # 1 and the $75,000 penalty for Violation # 2 should be reduced. The total of the imposed penalties, therefore, amounts to $150,000.
I note, however, that the Deputy Commissioner could have considered imposing higher penalties to promote compliance, given the bank’s history.
The last issue for decision is whether to make the name of the bank public. In my analysis, I consider factors such as the seriousness of the bank’s actions or omissions, its willingness to assume responsibility for the violations and to reimburse the affected consumers, the impact of the violations on consumers and consumer confidence and deterrence.
In its written representations, the bank notes that this matter is the result of a voluntary disclosure, that it proactively cooperated with the FCAC and that the affected customers were reimbursed without having to take any action themselves. It argues that public disclosure of its identity would be punitive for the bank.
As a matter of principle, exercising my discretion to make public the name of a regulated entity is in keeping with the statutory framework established by Parliament. Consequently, the decision to make public the bank’s name would be neither punitive nor contrary to the enforcement principles underlying the Act.
The bank also maintains that publication of its name would be of no benefit to consumers. It would only cause its customers to worry about their mortgages and unnecessarily warn other consumers about an issue that will have been rectified by the time of my decision.
I am willing to accept that, in this case, only the nature of the violations and the amount of the penalties be made public under section 31 of the FCAC Act. I am satisfied that the bank has understood the importance of respecting its disclosure obligations and I expect it to work harder at ensuring that its systems contain the necessary controls. The bank’s compliance programs should also prevent future violations.
Should the bank, however, commit a new violation, I will have to question its statements on the value and importance it places on its compliance obligations, and the outcome of that analysis could result in a less favourable decision.
Ottawa, November 7, 2017
Lucie M.A. Tedesco
Financial Consumer Agency of Canada
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