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BCSC tightens mortgage and investment exemptions

Securities commission initiatives spark debate in B.C.’s finance, real estate sectors
Mark Wang, BCSC director of capital markets regulation: “this does not change the risk profile of the product at all. It’s just about the purchasers getting a bit more personal advice in how those securities are appropriate for them or not” | Rob Kruyt

The BC Securities Commission (BCSC) is cracking down on registration exemptions for private mortgage investments. The move comes as the province’s regulator will also no longer allow finders to sell shares of prospectus-exempt companies without being a registered exempt-market dealer.

Some industry experts are hailing the move as a win for investors, while others claim the new restrictions on the small but growing market of prospectus-exempt mortgage investment entities (MIEs) could add unnecessary red tape to financing new developments – thereby constricting at least one avenue for creating more affordable housing.

“We felt that at the end of the day investors would be protected to a greater degree if the [dealer] exemptions were removed, but we didn’t feel capital raising would take [a hit],” said Mark Wang, BCSC director of capital markets regulation.

Prospectus-exempt companies – typically small startup ventures that do not require detailed financial submissions (a prospectus) to BCSC prior to raising funds – present a high-risk, high-reward play for investors.

Without a BCSC-vetted and registered exempt-market dealer handling investments, more vulnerable investors could fall prey to unscrupulous practices, said Marian Passmore, director of policy and COO of FAIR (Canadian Foundation for Advancement of Investor Rights).

“Generally speaking, people are told, ‘You want to avoid being defrauded.’ One main tool is to check registration to make sure you’re dealing with a registrant,” said Passmore. “So if you are dealing with someone who’s deemed reputable,… that provides some assurance.”

Wang said B.C. is lifting the registration exemption on prospectus-exempt companies to harmonize regulations across the country, prior to the now-delayed launch of the Capital Markets Regulatory Authority, a national securities regulatory regime.

Wang added that the investment risks of prospectus-exempt companies and MIEs remain the same.

“This does not change the risk profile of the product at all. It’s just about the purchasers getting a bit more personal advice in how those securities are appropriate for them or not,” said Wang.

As well, B.C. was the only jurisdiction in Canada with registration exemptions for mortgage investment corporations (MICs) and other MIEs, although it and Ontario are where most of such entities are based.

An MIC, for example, collects money from investors and grants builders/developers loans that are secured by homebuyers’ mortgages.

Wang said the BCSC tried to harmonize the MIE exemptions in 2013 but was met with industry opposition. However, in jurisdictions that do not have the MIE exemption, “no one’s demonstrated there has been a shortfall in mortgage capital raising,” Wang said.

However, Samantha Gale, CEO of the Canadian Mortgage Brokers Association – British Columbia, considers the move unnecessary.

“I’m not questioning the need for safety. But we need common-sense regulation,” said Gale, noting that the requirement to have registered dealers can cost upward of $200,000, which for a smaller MIC could handicap an investment.

Gale said the added costs would be passed on to borrowers or homebuyers.

She added that the number of MIEs is increasing, but the exact number is unknown. In 2015, Canada Mortgage and Housing Corp. (CMHC) pegged them at 1% of Canada’s total outstanding mortgage credit.

“This suggests that despite robust growth in the number of MICs, the potential for instability in the MIC segment of the market to spread to the broader housing finance system is limited,” stated CMHC.

Still, “there are hundreds of millions of dollars that fuel the private lending market” in B.C., said Gale. “So the significance is quite vital for a number of reasons.”

And because new federal mortgage stress tests (B-20) are limiting cash access from banks, Gale sees the private mortgage investment market playing an even larger role.

She said lost in the shuffle to create more affordable housing in B.C. are ways to finance developments.

Vancouver realtor Steve Saretsky said MICs are popular among small suburban builders who cannot obtain big bank loans. And he estimates MICs are much bigger now than CMHC said they were in 2015.

“They’re picking up slack from B-20.”

But Saretsky added that with land prices in Vancouver having seemingly peaked, the “buy and hope for the best” mentality of MICs could curtail their exponential growth, and a drop in property prices could imperil investments.

He disagreed with Gale on the affordability front, claiming a credit crunch, including more expensive regulatory costs for MICs, will lead to lower land valuations.

“In order for land prices to fall you have to restrict credit,” he said.

The BCSC’s Registration Exemption for Trades in Connection with Certain Prospectus-Exempt Distributions (BCI 32-513), also known as the “Northwest Exemption,” and the Exemption from Dealer Registration Requirement for Trades in Securities of Mortgage Investment Entities (BCI 32-517) will be scrapped in 2019, on April 30 and February 15, respectively. •