Ontario moves to toughen oversight of syndicated mortgage investments

theglobeandmail.com
By JANET MCFARLAND
April 27, 2017

The Ontario government will shift regulation of syndicated mortgage investment products to the Ontario Securities Commission in a move to toughen oversight of a rapidly growing industry that has faced investor complaints about its practices.

The province announced in its budget Thursday that it will transfer responsibility for the syndicated mortgage sector away from the Financial Services Commission of Ontario (FSCO), which is a provincial agency responsible for overseeing an array of financial services sectors from property insurers to pension plans.

The shift was recommended last year in a report from an expert panel that studied reforms to the FSCO. The panel said syndicated mortgages need to be regulated like other securities sold to the public, and said a watchdog like the OSC has more experience policing securities products.

The syndicated mortgage sector has exploded in Ontario in recent years as Toronto’s real estate market has boomed, with sales of syndicated mortgages in the province climbing more than 60 per cent in two years, to $6-billion in 2016.

Syndicated mortgages are investment products marketed by companies that finance real estate development projects using money provided by a pool of investors. The mortgages are typically provided to borrowers who cannot raise funds from conventional lenders, which means they pay a higher rate of interest for investors, but they have proved to be risky when borrowers are not financially stable.

Several mortgage firms have faced lawsuits in recent years from burned investors upset that development projects have not proceeded after companies faced financial difficulties.

As part of the reforms announced Thursday, the province said it will also impose caps on the amount individuals can invest in syndicated mortgage products. Details of the limits have not been determined, including whether they would apply per project or would be an annual total.

The province will also develop rules requiring people selling syndicated mortgage products to document their suitability for their clients and disclose more information about their risks.

Ontario said the shift of oversight to the OSC is consistent with the way syndicated mortgage products are regulated in other provinces, where oversight falls under the purview of securities regulators. There is no timeline yet for when the transfer will take effect.

“The government will work with regulators to plan an orderly transfer of the oversight of these products,” the budget document says.

Also Thursday, the province announced a number of new investment initiatives to spur business growth, including a plan to invest $130-million over five years in two projects aimed at developing the next generation in wireless technology, known as fifth generation or 5G.

The Liberal government is championing 5G - which will increase wireless transmission speeds by up to 1,000 times for mobile devices compared with current technology - because it is seen as the backbone infrastructure for new technologies, such as self-driving vehicles.

The two projects to receive funding are both industry-led consortiums working on advancing the commercialization of 5G networks across Ontario.

The province will also invest $80-million over five years to create the Autonomous Vehicle Innovation Network to help ready the province’s transportation systems and infrastructure for the spread of self-driving vehicles.

Ontario said it will provide $20-million over five years to partner with Waterloo’s Quantum Valley research centre to fund the Quantum Valley Ideas Lab. The project will help fund cutting-edge research in quantum science, which could improve the efficiencies of computers and other technologies in the future.

The government also announced a $4-million pilot project to help financial institutions work with companies to develop better cybersecurity measures.

The budget provided further details on previously announced projects, including the launch of a voucher program this spring to help provide financing for smaller companies to access professional business tools and services. The budget said the province launched a fund in January that will provide $20-million over three years to support collaboration between companies and colleges.

The government provided a timing update for companies with employee pension plans, saying it intends to publish “guiding principles” of a new funding framework for pension plans this spring and draft regulations by the fall.

The reforms will change the solvency funding rules that govern how companies must fund shortfalls in their pension plans. The rules ensure companies keep pension plans fully funded over the long term, but the province has been holding consultations and seeking public submissions to develop reforms that will help plan sponsors cope with volatile investment returns and long-term low interest rates.