Internal probe finds no evidence of misconduct by regulator in handling of PACE Credit Union case

Open this photo in gallery:

An Ontario financial regulator’s internal probe into claims that its staff failed to act on early warnings about alleged fraud at a credit union has not found evidence of improper conduct.

The Financial Services Regulatory Authority of Ontario (FSRA) launched an internal review in November in connection with a legal action it is pursuing against former senior executives of PACE Savings and Credit Union. The action alleges they engaged in fraud and self-dealing.

FSRA inherited the case against PACE from a predecessor regulator, Deposit Insurance Corp. of Ontario (DICO), which was taken over by FSRA last summer. DICO began investigating PACE in 2017, and ultimately seized control of the credit union in the fall of 2018 to protect depositors. But late last year, after the scope of the trouble at PACE became apparent, FSRA said it received separate and apparently “credible allegations” that some of its employees may not have acted on information received before 2017, which could have brought issues at PACE to light sooner.

In response, FSRA hired Stockwoods LLP, a boutique Toronto-based law firm that specializes in civil and commercial litigation, to investigate. Stockwoods reviewed more than 2,500 e-mails and interviewed those who made the allegations, as well as current and former staff. But the law firm did not find “documentary evidence" to support the claims, according to a statement from FSRA, and concluded that “the alleged improper conduct by DICO management was not demonstrated.”

While the review was continuing, some staff at FSRA were placed on paid leave “to preserve the integrity of the review process," and to avoid any perception that they could “impede or influence the review," FSRA spokeswoman Melissa Hogg said in a statement. But those measures were lifted on Jan. 15, “as an appropriate and thorough review was conducted and the allegations were not borne out."

The regulator is now “returning to business as usual,” Mr. Hogg said.

Paul Le Vay, a partner at Stockwoods who led the investigation, declined to comment.

Both FSRA and DICO have faced questions about why regulators didn’t raise red flags about PACE earlier, given that the scope of the alleged wrongdoing at the credit union traces back more than two decades.

During a routine on-site visit in June, 2017, DICO flagged certain loans as problematic. But it wasn’t until a whistle-blower came forward with detailed allegations that the regulator opened a more robust investigation into PACE’s management. Another year passed before DICO took control of PACE using a rare administration order in September, 2018. Six weeks after that, DICO fired PACE president Larry Smith and chief executive Phillip Smith.

Through their lawyers, Mr. Smith and Mr. Smith deny the allegations against them, which have not been proven in court.

FSRA is working to hand control of PACE back to its members, and has scheduled a meeting on Jan. 27 to begin a process to elect a new board of directors. And the regulator is “learning from our supervision of PACE as part of continuous improvement," Ms. Hogg said.

Now that FSRA’s internal probe is over, CEO Mark White said he is pleased the regulator’s team overseeing credit unions can do its work “without the potential distraction of these allegations."

“We took decisive action to treat the allegations seriously," he said in a statement.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.