Decision # 131
Commissioner's Reasons for Decision
In June 2017, the Deputy Commissioner of the Financial Consumer Agency of Canada (FCAC) issued a Notice of Violation to [text omitted] (the Bank) under subsection 22(2) of the Financial Consumer Agency of Canada Act (FCAC Act), alleging reasonable grounds to believe that the Bank committed one violation of subsection 6(4) of the Cost of Borrowing (Banks) Regulations (COBRs) in relation to mortgage renewal documentation provided by the Bank to its clients. Specifically the Notice of Violation alleges that:
- [text omitted] [agreements for mortgage renewals (AMRs)] and related confirmation letters issued by the Bank between 2008 and 2016; and
- [text omitted] [agreements for early renewals (AERs)] and related confirmation letters issued by the Bank between 2008 and 2015,
disclose the mortgage payment frequency as "accelerated" when, in fact, it is not. As a result, the Bank's disclosure is misleading.
The Deputy Commissioner further argues that the Bank's [text omitted] [AMRs and AERs] documentation is generally unclear, noting that (i) it is unclear whether the borrower must proactively take action to continue with an accelerated payment; and that (ii) the Bank included information on the payment of insurance premiums in [text omitted] [AMRs] without making it clear to borrowers that insurance is a separate add-on product.
The Notice of Violation proposes a penalty of $125,000.
In its representations dated July 2017, the Bank admits that its [text omitted] [AMR and AER] disclosure did not meet the requirements of subsection 6(4) of the COBRs as it describes the payment frequency as "accelerated", when in fact, it is not.
However, the Bank disputes the findings of the Deputy Commissioner relating to the clarity of the creditor insurance as an optional add-on product, noting that this concern was not referenced in the compliance report issued June 2017.
I have considered the evidence before me, including the Bank's representations. My decision follows.
Between 2008 and 2016, [text omitted] [AMRs] and resulting confirmation letters issued by the Bank to certain of its customers disclosed the payment frequency under the mortgage as "accelerated" when the cost of borrowing amounts disclosed and charged were not reflective of an accelerated payment. The same problem occurred in relation to [text omitted] [AERs] and resulting confirmation letters between 2008 and 2015.
Analysis and Conclusion
Subsection 6(4) of the COBRs requires that the disclosure that is in issue in this matter be "made in language, and presented in a manner, that is clear, simple and not misleading". (emphasis added)
In its representations, the Bank admits the breach of subsection 6(4) of the COBRs as it applies to the "accelerated" payment references in its [text omitted] [AMR and AER] documentation.
However, the Bank questions the allegation in the Notice of Violation that it included information on the payment of insurance premiums in [text omitted] [AMRs] without making it clear to borrowers that the insurance was a separate add-on option. Furthermore, the Bank notes that there is no mention of this concern in the compliance report and argues that the [text omitted] [AMR] does in fact make clear that creditor insurance is an optional add-on product.
I accept the Bank's objection on this issue. At the same time, and aside from the Bank's admission, the compliance report provides other undisputed evidence on the breach of subsection 6(4) of the COBRs - on the "accelerated" payment frequency issue - to dispose of this matter without considering the evidence or matter in dispute.
Therefore, having reviewed the evidence relating to the "accelerated" payment frequency references, I accept the Bank's admission of breach, and conclude that the [text omitted] [AMR and AER] disclosure in question is contrary to the requirements in subsection 6(4) of the COBRs.
I now turn to the amount of the penalty proposed in the Notice of Violation and the analysis of the criteria in section 20 of the FCAC Act.
Degree of Intent or Negligence
In its representations, the Bank argues that the error did not arise from negligence but rather "from a lack of detailed review of the disclosure document as a whole".
I am not persuaded by this argument. This arose precisely because of a failure to take proper care to review the disclosure documentation to ensure that the [text omitted] [AMRs and AERs] were clear on the payment frequency that applied. Had regular audits focussed not only on the accuracy of the calculations but also on the accuracy and clarity of the overall disclosure, this error would have been readily discernible. That the Bank failed to identify this issue for 7 years demonstrates a gap in the control measures in place.
The Bank argues that its customers did not suffer harm since they were aware of their payment amounts and the effect of the payments on their amortization periods. The Bank further argues that informing its customers of the inaccuracy in the disclosure of the payment frequency would not have provided them with additional insight and could have resulted in greater confusion than the existing inaccurate disclosure.
I do not agree with the statement that informing the affected customers would have resulted in greater confusion. Further, I am not convinced that there is no financial harm as a result of this issue. The purpose of subsection 6(4) of the COBRs is to ensure that consumers are better able to make informed decisions when entering into credit agreements. The provision of information that is not misleading is of particular importance for mortgages as they typically involve relatively large sums of money. A slight difference in interest rate or payment frequency can have a significant impact on the overall cost of borrowing.
In this case, approximately 307,000 customers received an [text omitted] [AER or AMR], followed by a confirmation letter, all of which were misleading in disclosing the payment frequency as "accelerated". While each customer may have been aware of their payment amounts and the effect of the payments on the amortization period, they were deprived of such information in relation to a truly accelerated payment option and were therefore, not properly informed when they entered into their agreements. As a result, customers under the impression that they maintained a bi-weekly accelerated payment frequency upon mortgage renewal may have paid more interest and had a longer amortization period than expected.
The Bank has had no violations in the five-year period prior to the issuance of the Notice of Violation.
Taking all of these factors into account, I confirm the proposed penalty of $125,000 as I do not accept the Bank's arguments relating to the degree of negligence or the harm done in this case.
The last issue for decision is whether to make public the name of the Bank in relation to this violation in accordance with section 31 of the FCAC Act. In its representations, the Bank argues that publication of its name could result in significant damage to its reputation and could undermine consumer confidence in its compliance framework. It considers that this risk would be excessive and disproportional to the nature of the deficiency involved, the "limited degree of harm" arising from the error and the measures taken to increase its control framework.
I note that the Bank brought this matter to the attention of the FCAC, has collaborated throughout the investigative process, recognizes the need to enhance its controls and has taken steps to do so. While it has taken responsibility for the breach by admitting same, it has yet to notify its customers or attempted to remediate them as it does not recognize that any harm has been caused.
While I disagree with the Bank's position with regard to the lack of harm resulting from this violation, there are other ways to address this issue. For example, I expect the Bank to take corrective measures - and be answerable for same through a compliance agreement to ensure against misleading its customers and the public with its [text omitted] [AMR and AER] documentation and to bolster its efforts to deliver on its stated commitment to enhance its control framework. For these reasons, I conclude that it is appropriate, in the circumstances, to not make public the Bank's name.
Ottawa, February 21, 2018
Lucie M.A. Tedesco
Financial Consumer Agency of Canada
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