Conflict

In todays challenging times, the title of this post could be about many things. Canada – US relations, the war in the Middle East, or even political divisions within Canada. But is really about none of that. Todays conflict I want to look at is one within our industry.

I spent the better part of 20 years serving 3 different regulatory masters. I was licensed for insurance, investments, and mortgages for the better pat of my career. Being licensed and insured in 3 industries meant you had to adhere to the rules and regulations of all 3 industries. Being securities licensed by the Mutual Fund Dealers Association ( MFDA ), then the Investment Industry Regulatory Organization of Canada ( IIROC ) for investments, the Financial Services Commission of Ontario ( FSCO ) for insurance, and then I also had to report to FSCO for mortgages ( now called FSRA ).

It was not uncommon to see one regulator have rules that went exactly against another regulator. It was quite normal to see a situation that required you to bend a rule at regulator 1 to stay on side of regulator 2. Regulators worked in silos, and could never seem to get to the same table that allowed them to make one simplified set of rules for the betterment of the industries they served, nor the general public. No matter what capacity I was working in at that exact moment, I was likely touching or advising on the clients finances – a responsibility I took extremely serious.

While most of the regulations followed the same overall approach, there was one major difference between investment and mortgages. It is a difference that I think does not get a lot of attention in our mortgage industry, but one that I feel is extremely important now that we have a new PM in Canada.

On the investment side of the ledger, or insurance for that matter, they took the issue of conflict of interest very seriously. Now, to be fair, we are seeing mortgage regulators slowly coming around on this issue, but they are at least 10 years behind the times. On the investment side of the business, the rules for conflicts were clearer than almost any piece of legislation I have ever seen. The rules were clear, and everyone knew them. The difference between the 2 sides here is that in the mortgage world, an actual conflict of interest must exist for it to become an issue with the regulator. On the investment side, it wasn’t whether a conflict DID exist, it is whether the POTENTIAL for a conflict COULD exist.

Those are 2 very big differences, with 2 very big distinctions. In a lot of situations, by the time you realize their is a conflict – it is too late. But if you operate under the ‘potential for conflict’ roadmap, you can ensure problems do not arise near as often. I have always wondered why mortgage regulators do not take a hard line in the sand like the investment regulators.

We now have a PM in Canada that has a lengthy track record. Most of the track record is good ( Bank of Canada Governor, Goldman Sachs, and Brookfield ) and some of it is not so great ( Governor of the Bank of England ). All in all though, I would say Mr. Carney is a very smart and talented guy. He is Harvard educated, has held very senior level roles and many companies and institutions, and knows a thing or two about how the economy works. It is really a breathe of fresh air to me that Canada will have a PM that doesn’t make comments like ” I don’t think about the economy”, or thinks that budgets balance themselves. Having someone with Mr. Carney’s experience, track record, proven skills at dealing during tough times ( He was Uncle Tiff during the 2008 meltdown ), and also helped the UK navigate the BREXIT situation. But, for all the good things he has done, and all the situations he has proven himself, it still sticks in my mind about a POTENTIAL for conflict that exists.

After leaving the BOE, Mr. Carney went on to work at Brookfield Asset Management. Brookfield Asset Management is a global behemoth that invests in many things like energy, renewables, infrastructure, the list goes on and on. They have over 1 trillion USD in assets, and are a major player in all corners of the world. Mr. Carney served as Chairman of the Board at Brookfield prior to his run to replace JT.

So, we have a very smart guy, who happened to be Chairman of the largest infrastructure business in the world running Canada. That same company that the new PM worked for also happens to own Genworth Financial. So, we have a housing crisis in Canada, and one of the mortgage insurers is owned by the same company that the PM used to work for. So, if mortgage insurers got into trouble in Canada, which master would our new PM serve? Would he bail out his former buddies at Brookfield, and make the taxpayers foot the bill, or would he serve the tax payers and tell his old friends ” too bad, so sad, you knew the risks”. I certainly don’t want to hypothesize here what would happen, but, the fact remains we could be in this situation within months. Again, it is not whether the conflict ACTUALLY exists, it is whether the POTENTIAL FOR CONFILCT COULD exist.

Brookfield Asset Management is also one of the worlds largest purchasers of infrastructure around the world. They buy things like ports, toll roads, airports, etc. etc. Brookfield has a very solid track record of buying up infrastructure assets, and making a mint off of them. If you look up the largest investors in Brookfield ( through all of its subsidiaries, funds, etc. ) you will find RBC, TD and 1832 Investments Group ( 1832 is owned by Scotia Bank ). So, I ask again, if a problem arose, would Mr. Carney side with the taxpayer, or would he side with his old friends at Brookfield who happen to be funded by his old friends at the Canadian banks?

If Canada decides to start infrastructure spending in a big way, which has been promised by Mr. Carney, I have zero doubt that Brookfield will be involved someway and somehow. They are simply too large to not be involved. But, the question remains – will they be involved because they were the most competitive, the quickest, the safest, or will they get the jobs because they got inside info?

Now, a lot of people are probably wondering why the hell I am talking about this on a mortgage blog. Well, the answer is that it could have major implications on your day to day business. You now have a PM that has a lot of experience, and a lot of friends in high places in Canada. Mr. Carney is on a first name basis with most of the big bankers, insurers, and regulators. From his time at the BOC and BOE, he knows what makes markets move, and he also knows where the bodies are buried in finance. He knows who saved who’s ass from default and when. He knows how to pull levers, knobs and switches to effect change in the banking and finance sector. This could be both good and bad.

Defaults are rising in Canada, listings are up double digits year over year, bankruptcies are climbing at a rate not seen in 40 years, and Canadian housing could be in for some real trouble. The problem is that the trouble is mostly insured through Canada’s 3 insurers, or through the Big 5’s loan loss reserves. A lot of the potential problems will come to light in the insurance and loan loss reserve space. As defaults climb we will start to see the potential problems. We all know that this could be coming. However, we now have a PM that is intimately familiar with the inner working of finance, and knows how to hide the sins from public view. Mr. Carney could ( I am not saying he would ) easily move things around, issue bonds, set policy that could easily help the big banks and the big insurers either eliminate or defer losses. This could be viewed as a good thing, or a bad thing depending where you sit. No matter how you view it, your job is going to become more complicated. I expect a lot of rules changes if Mr. Carney is able to win a seat and actually open Parliament and get down to business. If that happens, rules changes will be the norm, and you will constantly have to keep up to date.

The other reason that any changes are likely to really affect you is that, I suspect at least, that most of the rule changes, policy moves, etc. will be focused on making the Big 5 more competitive, and not so much for helping out the independent. So, make sure you are on good terms with your balance sheet lenders. If you don’t have a balance sheet lender in your arsenal – get one, and start building that good rapport with them now. When the shit hits the fan, all the politicians will always huddle around the Big 5 banks and make sure they stay afloat. Nothing would be more damaging to Canada’s international reputation than having a Canadian bank hit the skids – especially after Canada has gloated for the last 20 years about how ‘safe’ the banking system is.

I end with asking a question of everyone though. Taking what we looked at above, and knowing that our mortgage regulators do not require us to avoid a situation where a POTENTIAL for conflict exists, how do you run your business? I always looked through the lens that if I had to go in front of a judge and explain, what would the judge think? How would the situation and results be viewed through the lens of the public eye? Would it be clear that I acted in the best interest of my client at all times?

Sometimes we need to take a step back and really see if what we are doing is truly in the interest of a client. Personally I see the day in the not too distant future where the regulators will start aligning compensation for all lenders. Basically you will get paid the same no matter where you send it. Gone will be the days of bonus comp, Wizard spending accounts, gift cards, and company trips. I watched this happen a decade ago on the investment side, and I agree with it. While it is easy to critique Mr. Carney for his POTENTIAL for conflict of interest, we are not completely innocent either. How many times have you sent a deal to a lender simply because they pay you an extra 20 bps? How many times have you sent a deal in because you need to hit status with a lender ( regardless of rate)? How many times have you put your incentives above the client outcome?

I am not here to say that we are all guilty, nor are we all innocent. But, I do think it is high time that the mortgage regulators get on side with the other regulators and build a system that doesn’t only remove the ACTUAL conflicts, but removes the POTENTIAL for conflict as well.