Borrower choice and the success of mortgage brokers is tied to the availability of a wide variety of mortgage funds. Apart from conventional insured and uninsured mortgages, there are Alt-A and B, 1st and 2nd mortgages available through the private mortgage market.
For years, Mortgage Investment Corporation (MIC) lenders have provided billions of dollars of this private alternative mortgage financing. But under proposed regulations, this opportunity for borrowers and brokers will be severely curtailed, causing measurable economic harm.
Have you ever heard of an Exempt Market Product? They’ve been growing in popularity, becoming an attractive alternatives to stocks, mutual funds and other publicly traded investments.
Exempt Market Products are basically investments that are not required to be offered to the public by Prospectus. Instead, they can be offered by way of an Offering Memorandum, a disclosure document that is well-established and proven effective.
In Ontario, however, there is no Offering Memorandum option. Only wealthy individuals can make investments in Exempt Market Products, which is eminently unfair to the average — non-wealthy — investor.
Over the last few years Canada’s Federal government has been trying to create a national securities regulator. Ottawa’s goal has been to address inefficiencies that stem from 13 provinces and territories having their own securities commissions.
The federal government took the case all the way to the Supreme Court of Canada in 2011. While the Supreme Court ruled that securities regulation is a provincial responsibility, it also recognized that the Federal government has standing with the provinces.
Last fall the Federal government and the governments of British Columbia and Ontario announced that they were forming a new single Cooperative Capital Markets Regulator (CCMR), which hopes to attract other provinces to join. The goal is to commence operations by July 1, 2015.
The Ministries of Finance of British Columbia and Ontario are now drafting new securities legislation of their own that will transfer regulation and oversight to the CCMR. Harmonization of securities regulation and oversight between British Columbia and Ontario is the goal of the new regulator. While efforts to streamline capital markets is a positive step, concerns are mounting over this proposal in question.
The changes proposed will severely diminish investors’ rights to guide their own investment choices. They will also restrict the amount of capital that can be raised through the Exempt Market, thus limiting access by Canadian borrowers to private non-conventional, non-insured mortgage financing.
There are two worrisome changes in particular:
Investors will be subject to drastically reduced investment limits (a maximum of either $30,000 or $10,000 per year for all Exempt Market investments combined, as determined by their income and “net investable assets classification”), and;
Investors will be prohibited from dealing directly with related issuers, and instead be required to make investments through a third party (stock broker, financial planner, investment advisor, EMD, etc.). This introduces news costs, inefficiencies and potential information barriers for Canadians who wish to participate in this growing investment class.
These changes will have severe repercussions on the amount of private mortgage financing available to Canadian borrowers.
Why is this issue important to investors?
Ontario has traditionally stood against the public's ability to invest in Exempt Market Products, which include mortgage investments. In British Columbia and elsewhere, virtually anyone can make such investments.
In an effort to make Exempt Market Products more widely available in Ontario, the Ontario Securities Commission (OSC) recently published a proposal to create a new Offering Memorandum with guidelines for Exempt Markets. These proposals make substantive changes to both investor qualifications and dealer requirements.
Some changes are positive for the industry as they further enhance investor protection. As one example, investor decision-making will now be aided by improved investor suitability, oversight and enforcement. That said, these are already common standards for Offering Memoranda in provinces like British Columbia.
Under British Columbia’s long-standing Offering Memorandum exemption anyone can invest in an Exempt Market product in any amount they choose. They can do it through any dealer they choose, with no investor eligibility requirements or investment limits. They do, however, have to meet suitability requirements and then read and sign the traditional risk acknowledgement.
As a result, British Columbia investors presently have a clear advantage. It is this advantage that the proposed British Columbia-Ontario alignment will eliminate. We must therefore ask the question: Should investment rights be eliminated because Ontario, the larger of the partners, wishes to impose its will on British Columbians?
The Canadian Securities Administrators (CSA) — Alberta, Quebec, Saskatchewan and New Brunswick regulators — have proposed and published for comment similar, but more flexible, Offering Memorandum exemptions: National Instrument 45-106 Prospectus and Registration Exemptions (NI 45-106). Like in B.C., under CSA’s Offering Memorandum exemption anyone can invest in an Exempt Market Product.
What you can do
To defeat this proposal, Canadians must voice strong opposition to it. It is regulatory policy that could severely limit private mortgage funds, increase borrowers' costs and limit their choices. Governments and regulators need to understand that this hurts borrowers, investors and brokers.
To achieve this, you the consumer and/or broker need to provide your voice on the proposed regulations.
Provincial regulators are seeking feedback, and the deadline to provide input is just 10 days from today: June 18, 2014.
Where to send your response (Individual investors)