Will broker-owners start selling up as monitoring requirements intensify?
New anti-money laundering and anti-terrorist financing (AML/ATF) requirements coming into effect for mortgage brokerages on October 11 could mean significant turbulence ahead for the industry, according to a leading principal broker who believes the rules are being poorly implemented and explained.
Sadiq Boodoo (pictured) of Approved Financial told Canadian Mortgage Professional that obligations under the adjustment, which will impose specific reporting requirements on mortgage lending entities including administrators, brokerages, and lenders to Canada’s national financial intelligence agency, have not been communicated well to the industry by regulators.
What’s more, the need to document and continually monitor potential borrower risk is a change that doesn’t account for the different ways brokerages operate, according to Boodoo. “The reality is FINTRAC [the Financial Transactions and Reports Analysis Centre of Canada] has been off on this one, because they didn’t spend the time to understand our industry,” he said.
“If they were focusing on brokerages that lend out money, I can understand that. But they focused on all brokerages instead of differentiating between [those] that lend the money directly to consumers versus the ones that are your traditional brokers who just arrange mortgages for clients through established lenders.”
KYC [Know Your Customer] and identification requirements already overlap with Ontario brokerages’ obligations under the Mortgage Brokerages, Lenders and Administrators Act. However, the definition of a “suspicious transaction” and the need to report those to FINTRAC – at risk of financial penalty for failing to do so – could cause problems for brokerages in the future, Boodoo said.
Continually having to assess clients to determine whether they’re high, medium, or low risk is “senseless” he said, “because we’re transaction-driven. Our ability to monitor activities of clients is limited.
“I don’t see it as [fair] that a brokerage is going to Google a client’s name every six months or every year, or whatever period FINTRAC deems is reasonable without telling us what’s reasonable, to see if something’s changed on their situation… At what point does it become unreasonable, and not operationally functional, for brokerage data to meet these ongoing monitoring requirements?”
New FINTRAC rules set for October 11 will require mortgage brokers across Canada to implement stricter compliance programs, including rigorous transaction monitoring and annual audits. https://t.co/8OTQ2vH7Ez#mortgageindustry #mortgagebroker #financialregulation
— Canadian Mortgage Professional Magazine (@CMPmagazine) October 2, 2024
Lack of clarity in FINTRAC expectations a cause for concern
While FINTRAC has published some guidance for brokerages on their responsibilities under the new regulation, Boodoo said it had been vague on its exact expectations – something he described as especially unhelpful for mortgage brokerages because they face potentially stiff fines for failure to meet the regulator’s requirements.
He expressed further frustration with FINTRAC’s seeming lack of understanding of the mortgage process and how it operates, such as when a client may fail to respond to a specific request by a broker. “It’s not unusual in our industry that clients ‘ghost’ brokers because they got a different rate or they went with somebody else,” he said.
“Just because I asked clients for the proof of downpayment and I don’t hear back from them, that doesn’t necessarily mean it’s a suspicious transaction. But to a person who doesn’t know our industry, that might seem like, ‘You asked for this, the client didn’t want to provide it because maybe there’s something suspicious with the source of the money so they went to somebody else,’ whereas being an experienced broker, we could say, ‘Well, that happens all the time. It’s got nothing to do with the source of the funds.’”
Is a wave of consolidation on the way in the brokerage space?
The “undue burden” the changes are likely to have on brokers, Boodoo said, could see a wave of consolidation in the brokering space as broker-owners weigh whether it’s still worth it to run their own shop.
With the Financial Services Regulatory Authority of Ontario (FSRA) likely to introduce further oversight requirements for brokerage owners down the line, many could be faced with a difficult decision. “It’s going to come to that point where a lot of broker-owners are going to say, ‘You know what? I’m burning too much energy behind administration. I’m just going to consolidate with another brokerage, or go under another brokerage and operate a team and let them handle all the burden,’” Boodoo said.
The financial costs, time and energy required to meet FINTRAC’s expectations under the impending changes, he added, mean it may make sense for many broker-owners to take that step. “Realistically for the split that they’re going to give up to that brokerage, whether it’s 10 basis points, five basis points or whatever the case is, it’s well worth it.”
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