Mortgage Broker

CMB MAGAZINE cmba-achc.ca spring 2016 | 23 disclose&destroy viewed in isolation from other requirements, is minor; it is the cumulative effect of regula- tions which can become substantial. is is one of the complaints of small businesses in B.C., which caused the government to assign specific personnel to reduce "red tape". All of government, including regulators, must be vigilant to monitor the regulations they put into place, so as to properly serve the public by protecting their interest and keeping services affordable. e trouble is, the cost of compliance will not always be minor. As noted, a transaction is com- prised of many variables that impact commis- sion. For a broker to take the time to calculate and disclose all possible scenarios would be onerous for the broker and potentially confusing for the consumer. On the other hand, to allow a broker to overly generalize the situations or calculations would defeat any purpose of the, we say, needless disclosure. Bank representatives are not held to the same regulatory requirements as brokers, due mainly to the constitutional division of powers giving the federal government jurisdiction over banks. While provincial regulators cannot ignore this division of powers, they do need to take the reality of the business environment into consideration; imposing another regulation on mortgage brokers, and not having the authority to impose it on bank representatives, further unfairly tilts the mortgage brokering playing field in favour of bank representatives. ere may be an alternative for the Regis- trar's office to pursue its goal without pursuing the proposed change. Measures to addressing conflicts in the financial services sectors gener- ally, and the mortgage broker industry specifi- cally, fall into one of two broad categories: n measures to require disclosing the conflicts so that clients can make informed choices; and n measures to eliminate or reduce the actual conflict. Focusing on reducing opportuni- ties for conflicts is considered by many to be a superior method of tackling conflict issues over disclosure solutions. In addition to our above comments, experience shows that measures requiring disclosure of conflicts do not work; in fact, they harm the consumer. e key problems with the approach are identified in the following quote from the United States Department of Labor when reviewing new regulations for retirement investment advisers: We considered relying on disclosure alone to combat biased advice. But a large body of research has found that the effects of disclosures by themselves are limited and, in some cases, can lead to harms and weaker consumer protections. Indeed, many financial advisers already provide disclosures and the evidence suggests that they are not highly effective. Consumers rarely understand how their advisers are regulated or paid, and can seldom effectively guard against the impact of conflicts, even when the conflicts are disclosed. Moreover, in practice, disclosures of conflicts of interest can actually backfire. Research in behavioural economics and psychology finds that when advisers disclose their conflicts, they may be more willing to pursue their own interest over those of their clients and thus give worse advice. Investors may interpret the disclosure as a sign of honesty and become more likely to follow an adviser's biased advice. An alternative measure to reduce instances of mortgage brokers acting improperly in conflict scenarios would be to impose product suitability requirements on them. is is of course already a requirement in other provinces, such as On- tario. However, it is not a requirement in B.C. e Mortgage Brokers Council of Canada, in its August 2014 Mortgage Brokering Product Suitability Review, explains product suitability as follows: e MBRCC discovered there are various concepts of "mortgage product suitability". e main features of these concepts include the following: n the appropriateness of the mortgage in light of the borrower's needs and circum- stances; n the affordability of the mortgage/the borrower's ability to repay; and n the most appropriate option(s) based on the products and lenders that are available to the mortgage broker. is approach would hold brokers to "fiduciary-like" standards of product suitabil- ity requirements. When a broker provides mortgage recommendations to clients, he or she would be required to always recommend the most suitable mortgage for the client and act in their best interests despite the conflict and regardless of the potential compensation. ere could be exemptions for those brokers who serve as "order takers" or provide public education. In the short term, product suitability requirements could be imposed on brokers pursuant to currently existing sections of the Mortgage Brokers Act. In the long term, mort- gage broker conflicts and solutions to conflicts should be debated in the course of the present legislative review of the Act. If (notwithstanding the considerable expressed concerns of industry) the Registrar is going to proceed with the proposal, brokers should be permitted to provide compensation disclosure by referencing estimated base points rather than actual dollar amounts. While this will not avoid the consequences feared, given the challenges in providing specific dollar amounts, it is the only possible method of disclosing broker compensation to borrowers.

• Cover