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For the OSC, the Home Capital settlement is a small victory with some big lessons

Signage is displayed outside the Home Capital Group Inc. headquarters office in Toronto, Ontario, Canada, on Thursday, May 4, 2017.

Cole Burston/Bloomberg

The Ontario Securities Commission notched a signature win Wednesday by settling with Home Capital Group Inc.

However, methinks the regulator doth protest too much in attempting to distance itself from the carnage that resulted from the OSC's allegations of disclosure problems at Canada's largest alternative mortgage company.

The OSC, led by newly-named chair Maureen Jensen and equally freshly-minted head of enforcement Jeff Kehoe, triggered a crisis of confidence at Home Capital. That is self-evident. The regulator alleged in April that Home Capital didn't come clean on fraud that took place two years ago in its mortgage business. In the days that followed, client deposits flew out the doors and the lender came close to collapse.

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Read more: OSC settlement boosts Home Capital, but funding concerns loom large

Home Capital's failure promised significant fallout: Thousands of homeowners in the lurch, 900 employees out of work, credit markets reeling and chaos in residential real estate.

The company found a path out of the muck. Part of the solution, announced Wednesday, is a regulatory settlement that sees Home Capital absolve the OSC of any blame for the whole mess. In a news release, Home Capital chair Brenda Eprile said the company "acknowledges that the Commission is not to blame for the events of recent months involving its liquidity position."

I'm guessing Ms. Eprile grit her teeth while signing off on that line. But her goal is to get Home Capital moving forward, and that meant resolving regulatory issues and potential class-action lawsuits. As part of a settlement that's going to set back Home Capital – or its insurance company – approximately $30-million, it doesn't cost Ms. Eprile anything to give the OSC a little political coverage.

I'm also guessing that Ontario's Premier was thrilled to see that statement, as the provincial Liberals wouldn't want to be fighting an election next year as the party that nearly vaporized the largest lender to homeowners who can't borrow from the big banks.

But that doesn't mean Ontario's regulator acquitted itself with distinction at Home Capital. Financial institutions require the faith of clients to stay in business, and regulatory allegations against the Toronto-based mortgage lender called that faith into question. The resulting run on deposits shows why federal regulators make a point of being discreet in dealing with problems at the banks and insurers they supervise.

There are lessons to be learned from Home Capital. At the OSC, there has to be reflection on the cost paid to win a settlement. The regulator has to enforce the rules, and saw a disclosure issue at Home Capital. But there's a strongly-held belief in legal circles that the OSC took a hard line on penalties to send a message to the financial community and that this was the wrong place to take that stand.

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From the OSC's point of view, sources say there is an equally strongly-held view that Home Capital and its legal advisers dug in their heels on the terms of the settlement and that led to the public showdown.

This view is bolstered by the fact that many lawyers believe Home Capital and its executives would have been cleared if the OSC allegations had ever been taken to a hearing. Disclosure decisions that Home Capital made back in 2015 were approved by one former OSC chair – lawyer Jim Baillie from law firm Torys, and are now being defended by another former head of OSC, Stikeman Elliott's Ed Waitzer.

What's now clear is the company would have been crippled, or dead, long before any hearing was held, sending shock waves through the financial and real estate markets. That's an outcome we're fortunate to have avoided.

Video: Money Monitor: Investing vs. paying down a mortgage (The Canadian Press)
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About the Author
Business Columnist

Andrew Willis is a business columnist for the Report on Business at The Globe and Mail, based in Toronto.He has been in business communications and journalism for three decades. More

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