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Bridge Beat

Sep 18, 2020

Fortress Settles with Financial Services Regulatory Authority of Ontario ("FSRA")

Fortress Real Developments Inc., the development consultant assisting developers to structure and finalize new residential projects between 2009 and 2017, pursuant to Minutes of Settlement dated August 21, 2020 voluntarily agreed to pay a fine of $250,000 to FSRA to settle potential FSRA claims that Fortress had violated the Mortgage Brokers Act by arranging loans to developers without being properly licensed to do so.  https://tinyurl.com/yxgvng4m

No other breaches of provincial legislations were alleged by FSRA nor did it identify any dealings with individual investors by Fortress.  In the second recital of the Minutes of Settlement, it was stated that "The DCAs did not relate to advising lenders or members of the general public or conduct directed at lenders or members of the general public."  We understand that notwithstanding the allegations of FSRA, all individuals acting on behalf of Fortress in connection with these activities were all licensed mortgage brokers.  However, rather than entering into protracted legal proceedings, Fortress agreed to this settlement on the basis of this limited penalty.

In any event, it is also interesting to note that notwithstanding all the negative press over the last 3 years, I am not aware of any other actions taken by any regulatory or other authorities against Fortress. 

What the media has all but ignored is the failure of investors to take steps to fully understand the nature of their investments and the risks being taken when taking a position in a syndicated second or subordinate mortgage for properties under development.  There are clearly significant risks in these types of secondary loans which were to be compensated by significantly higher returns.  In my view, much of the problem lies with investors themselves.  Blinded by the high returns secured by a mortgage, they didn't bother to listen to their advisors (both legal and financial), who in the future should have advised them of the risks as disclosed by the sales material) or read the detailed materials carefully themselves. 

But even more so, much of the blame lies with the financial advisors who pushed their investors to go into these loans with significant investments, relative to the net worth of these investors and exposed their portfolios to unnecessary risks or overexposure to one asset class.  Enticed by significant fees and commissions, clearly these advisors were not putting their client's best interests at the forefront.  The media in numerous articles have highlighted the plight of a number of individual investors who put significant, if not entire, savings into these mortgages at the suggestion of their own financial advisors.  It is those advisors who should be criticized and held to account.

The days of syndicated mortgages are probably over.  However, the desire for high returns by investors which blinds them to the real risks of certain investments providing high returns, coupled with financial advisors who are equally enticed by commissions and fees, will have impacts in some other high risk product on the marketplace in the future

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