Neil Gross is president of Component Strategies

One of the biggest imbroglios to hit Canada’s investment business is coming to an abrupt end, thanks to a financial sector regulator. But anyone who thinks this is an example of effective regulation should think again.

The fracas arose from the activities of two Ontario-based companies, Fortress Real Properties Inc. and Fortress Real Developments Inc. Between 2009 and 2017, they enticed 14,000 retail investors to pour nearly $1-billion into syndicated mortgages arranged for the purpose of financing construction on Fortress-promoted commercial real estate projects.

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Many investors say they were led to believe these investments would be safe and secure. However, several of the construction projects never made it to completion. They were hobbled by huge fees and high commissions that Fortress extracted as part of its financing scheme.

And when the stricken projects were liquidated, their land value often proved insufficient to cover syndicated mortgage holders after higher-ranking lenders were paid. Consequently, thousands of Fortress investors were badly stung or wiped out entirely – losing perhaps hundreds of millions of dollars in total.

Fortress has repeatedly denied allegations that it misled investors. Regardless, what’s incredible is that the regulator responsible for supervising syndicated mortgage investments stood by and let all this unfold even though Fortress’s chief executive officer and controlling shareholder previously had been heavily sanctioned by other regulatory agencies. In 2005, he was banned for life by the Mutual Fund Dealers Association; and in 2011, on different charges, the Ontario Securities Commission barred him from the province’s capital markets for 15 years.

The mortgage overseer was the Financial Services Commission of Ontario. It was a shambles – a regulator that ultimately had to be abolished and replaced by a brand-new entity, the Financial Services Regulatory Authority, which took over in 2019.

Yet, even this changeover went awry. FSRA wasn’t intended or built to scrutinize complex syndicated commercial mortgages. That was supposed to be assigned to the more experienced and better-resourced OSC. But the handover has been mired in intricacies and hasn’t happened yet.

By default, therefore, FSRA has been conducting all syndicated mortgage regulation in Ontario, whether or not it has all the necessary expertise. So it fell to FSRA to prosecute Fortress for dealing in mortgages without a licence.

Multiple adjournments have stalled the case for years. Then, out of the blue this month, FSRA announced that everything’s been settled by Fortress agreeing to pay an administrative penalty of $250,000 – an astonishingly low amount in comparison to the estimated $320-million that Fortress pocketed in fees and paid its agents.

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And just like that, the regulatory file was closed. Moreover, everything seems to have been wrapped up without an admission being required or an adjudicative finding being made about how much harm Fortress caused.

It’s hard to see this feeble administrative outcome as something that’s in the public interest. FSRA hasn’t provided a rationale for the low penalty, or an explanation about why Fortress was given such a settlement deal without first compensating its investors.

FSRA also hasn’t explained why it let the degree of harm remain obscure – thereby depriving the public of a yardstick to measure whether the result is reasonable in all the circumstances, and whether the penalty is adequate to deter others from engaging in similar misconduct.

Furthermore, the public has been left without a thorough examination of what happened in this case, and why. Were Ontario’s investment watchdogs simply asleep, under-resourced, out of their depth, or all three? Or was there a gap in what our regulatory fabric covers, and is that hole still there?

These unanswered questions make evident three long-standing shortcomings in our regulatory system.

First, when a financial regulator determines that someone lacks integrity, there is no mechanism in place to ensure they cannot sell a different type of investment overseen by another regulator. Canada needs such a mechanism – all the more so because we have such a fragmented regulatory structure.

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Second, Canadian financial regulators often lack tools, or the inclination to use them, to secure compensation for harmed investors. Victims usually are left to seek remedies on their own. In that sense, regulators aren’t protecting them.

Thirdly, we don’t have a process allowing members of the public to intervene and raise objections when proposals for settling regulatory proceedings are being considered for approval. Typically the negotiated terms aren’t made public unless, and until, a settlement’s been approved by the regulator and it’s all a done deal.

But as the Fortress debacle shows, shielding things from public view can produce bad results. Sometimes, nothing short of a full and open autopsy, driven by public outrage, will ensure that the public interest is truly served.

Editor’s note: This column has been updated to clarify that while the Financial Services Regulatory Authority was formed in 2016, it officially replaced the Financial Services Commission of Ontario in 2019.

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