Decision #136

Commissioner’s reasons for Decision

Summary

1. By notice of violation issued on May 16, 2019, in accordance with subsection 22(2) of the Financial Consumer Agency of Canada Act (Act), staff of the Supervision and Enforcement Branch of the Financial Consumer Agency of Canada (FCAC Staff) allege that Canadian Western Bank (CWB or Bank) committed four violations of the Cost of Borrowing (Banks) Regulations (Regulations) in relation to a number of CWB credit products.

2. Specifically, FCAC Staff allege that from January 2010 and as at May 16, 2019 (the date that the notice of violation was issued), the Bank failed to disclose to borrowers certain non-interest charges and fees—such as application, renewal, appraisal and legal fees—in the:

1. information box for a number of credit products, contrary to paragraph 6(2.1)(b) of the Regulations (Violation #1), and for which FCAC Staff propose a penalty of $125,000;
2. credit agreement for its line of credit, contrary to paragraph 10(1)(c) of the Regulations (Violation #2), and for which FCAC Staff propose a penalty of $50,000;
3. credit agreement for its fixed-rate loan or mortgage, contrary to paragraph 8(1)(q) of the Regulations (Violation #3), and for which FCAC Staff propose a penalty of $50,000;
4. credit agreement for its variable-rate loan or mortgage, contrary to paragraph 9(1) of the Regulations (Violation #4), and for which FCAC Staff propose a penalty of $25,000.

3. In representations dated June 14, 2019 (Representations),^{Footnote 1}  the Bank admits that the violations occurred as alleged in the notice of violation. However, CWB submits that the proposed penalties should be reduced. In addition, the Bank objects to its name being made public in this case.

4. Consequently, the two issues for decision in this case are whether to (i) impose the penalty amounts proposed, lesser penalties or no penalties; and (ii) make public the name of the Bank together with the nature of the violations and the penalties imposed, under section 31 of the Act.

5. I have considered the record before me, including the compliance report attached to the notice of violation and the Representations relevant to CWB. I have identified no reason to reduce the amount of the penalty proposed for Violations #1 and #4, therefore they stand as proposed. I have determined that it would be appropriate to reduce the amount of the penalties for Violations #2 and #3 to $25,000 each.

6. I have also decided that making the name of the Bank public in this case would be appropriate. My reasons follow.

Factual Background

7. The facts that describe the four violations are undisputed.

8. Between January 2010 and May 2019, CWB failed to disclose to borrowers certain non-interest costs and fees applicable to a number of its credit products in the manner required by the Regulations.

9. The Bank provided disclosure documents to borrowers where the information box on the front page did not include certain non-interest fees. The fees in question included lender-imposed fees (e.g. administration fee, application fee, documentation fee) which were retained by CWB, and third-party fees (e.g. appraisal fees, legal fees, title insurance fees) which were passed through or paid directly by the borrower to third parties. These are the facts relevant for Violation #1.

10. The Bank provided credit agreements to borrowers for lines of credit (Violation #2), fixed-rate loans and mortgages (Violation #3), and variable-rate loans and mortgages (Violation #4) which did not disclose appraisal fees payable to third parties.

11. As of the date of the notice of violation, these failures were continuing.

Analysis and Conclusion

12. CWB admits to having committed the four violations of the Regulations. Consequently, the issues for decision are whether to impose or reduce the penalty amounts proposed and whether to exercise my discretion under section 31 of the Act to make public the name of the Bank together with the nature of the violations and the amount of the penalties. My analysis and conclusions are organized by issue.

Penalty Amounts

13. In its Representations, CWB requests a reduction in the proposed penalties from a total of $250,000 for the four violations to a total of $150,000. As such, it is seeking an overall reduction of $100,000 with the resulting penalty amounts reduced to $85,000 for Violation #1, $25,000 for Violation #2, $25,000 for Violation #3 and $15,000 for Violation #4.

14. In support of this request, CWB presents the view that the nature of the deficiencies, the degree of harm and the specific measures that CWB has implemented to enhance its compliance framework and internal controls do not warrant the imposition of the proposed penalties.

15. Specifically, the Bank states that the proposed penalty amounts are not commensurate with the degree of harm to consumers which it asserts was “minimal in the circumstances.” CWB maintains that a relatively small number of customers were affected and that while it admits that the required disclosure format was not provided to customers, CWB did provide the same information in other ways. According to the Bank, “[i]n all cases, borrowers were fully aware of the charges for which they are responsible because the fees were prominently disclosed in the statement of disclosure and/or explained to borrowers verbally, prior to the borrower entering into the agreement.”

16. In addition, the Bank points to the lack of evidence of reckless behaviour or negligence in this matter. CWB believes that the breach was of a technical nature resulting from a good faith but different interpretation of the requirements than FCAC Staff. CWB asserts that there was no intent to conceal, understate or otherwise mislead consumers and points to the lack of a single customer complaint as evidence to support this assertion.

17. I have considered the Bank’s Representations along with the information contained in the compliance report and the notice of violation. FCAC Staff acknowledge that some of the required information was contained in alternate forms of disclosure.

18. It is CWB’s obligation to understand its regulatory requirements and to ensure its customers receive the benefit of this disclosure. The Regulations came into force in January 2010, were supplemented by FCAC guidance (CG-4 Information box examples for the Cost of Borrowing Regulations), including examples, and are explicitly prescriptive. There was every opportunity for CWB to develop compliant disclosure. I note that CWB self-assessed and attested to compliance with the Regulations in response to FCAC inquiries in 2010.

19. I further note that the breaches occurred over nine years and were continuing as of the date of the notice of violation. The lack of early identification of the issue, the repeated failures to achieve agreed milestones in addressing these breaches, and the inability to reach full compliance, demonstrate CWB’s negligence in the fulfilment of its compliance obligations.

20. The degree of harm resulting from non-compliant disclosure is inherently imprecise as it is impossible to know with certainty what specific information a customer relied on at any point in time. However, the purpose of the Regulations is to ensure that all consumers receive a clear and consistent minimum standard of disclosure in order to enable them to make informed financial decisions.

21. I note that from January 1, 2010 to May 31, 2018 the total amount of improperly disclosed fees and potentially affected customers may have been as high as; (i) $1.9 million and 4,275 customers (Violation #1) (ii) $584,181 and 1,169 customers (Violation #2) (iii) $863,928 and 1,728 customers (Violation #3), and (iv) $149,935 and 299 customers (Violation #4).^{Footnote 2}  These figures do not include fees or customers affected subsequent to May 2018 as the disclosure deficiencies were still outstanding as at May 16, 2019 (the date of the notice of violation).

22. CWB’s positive compliance history and the steps taken to improve disclosure documents and relevant policies, procedures and control measures are acknowledged by FCAC Staff.

23. However, CWB has had mixed success fulfilling its obligation to self-report these compliance issues. While CWB did report compliance issues in June 2017, not all fees were identified, and the report was filed close to eight months after FCAC raised its concerns.

24. As a result, I find that the penalty proposed for Violation #1 is appropriate to encourage compliance and I find no reason to reduce it in this case. The penalty for Violation #1 stands as proposed.

25. As for Violations #2, #3 and #4, I note that they result from the same deficiency, namely the failure to disclose the third-party appraisal fee in the credit agreement for the three different credit products. The degree of negligence and the nature of the harm are also similar. Accordingly, the amount of the penalty for each of Violations #2, #3 and #4 should be similar. Therefore, the penalty for each of Violations #2 and #3 is reduced to $25,000, and the penalty for Violation #4 stands at $25,000 as proposed. I note that my authority under section 23 of the Act does not permit me to increase the amount of the penalty proposed in the notice of violation.

Publication

26. Turning to the matter of the exercise of my discretion to make public the name of the Bank, I note that CWB is opposed and views the combination of the penalties and the publication of its name as punitive relative to its level of blameworthiness. The Bank believes the publication of its name would punish it rather than encourage compliance.

27. I have considered the Bank’s Representations relative to this issue, including the Bank’s compliance history and that CWB has accepted responsibility and has made significant investments in improving its internal controls, systems, policies and procedures to prevent future breaches.

28. It is my view that making public the Bank’s name in this case is an appropriate measure and a suitable specific deterrent. Publication would encourage CWB to learn from this issue and improve its ability to fulfill its regulatory obligations.

29. Publication would also have a deterrent effect on other regulated entities generally, to ensure disclosure requirements are met and any failures are remedied as expeditiously as possible. Publication is therefore consistent with FCAC’s purpose to protect and educate consumers and to promote the clear and consistent disclosure of all the costs of borrowing.

30. Therefore, I conclude that it would be appropriate to exercise my discretion in this case to make public that CWB is the bank that committed these violations, together with the nature of the violations and the penalties imposed.

Judith N. Robertson
Commissioner
Financial Consumer Agency of Canada

Ottawa, July 14, 2020