Hundreds of BC brokerage filings were found to have issues related to disclosures, trust account management, and timely preparation of reconciliations, an audit report by the BC Financial Services Authority (BCFSA) revealed.
On Monday, the BCFSA published its findings from over 120 audits of various real estate brokerages in British Columbia over the past year, particularly as they relate to the brokerages' filings of annual accountant's reports, identifying the 10 most common issues that auditors found with the filings.
At the top of the list were infractions relating to Rule 54, called the Disclosure of Representation in Trading Services. Rule 54 requires that licensees "disclose whether or not the licensee will represent the party as a client" and that the disclosure include "the duties and responsibilities of licensees to clients and unrepresented parties, how to file a complaint about a licensee's conduct, and information about the right of rescission."
The BCFSA said it found 49 instances of this where licensees "failed to disclose the nature of the representation that licensee would provide."
The second-most common issue related to Rule 80(C). The rule covers trust account and general account records, mandating that a record of amounts received and disbursed be prepared "no later than five weeks after the end of the month being reconciled," but the BCFSA found 35 instances where the brokerage's managing broker did not ensure that this was done within that timeframe.
Bank reconciliation requirements came up again in the third-most common issue, specifically in relation to Rule 72(2), which requires that the monthly reconciliation under Rule 80 and monthly trust liability and asset reconciliation under Rule 81 be "reviewed, dated, and initialled by a related managing broker or a person designated by a related managing broker." The BCFSA found 29 instances where a managing broker did not do this.
The fourth-most common issue was then regarding Rule 81 and the aforementioned trust liability and asset reconciliation, which are also required to be prepared no later than five weeks after the end of the month. The BCFSA found 28 instances where this was not done.
Issues regarding Rule 52, 54, and 55, all of which cover proper disclosure, took the fifth-ranking spot. Specifically, the BFSA found 27 instances where disclosures were not properly made -- in writing, with details about how much payment the licensee will receive, details about what the representation entails, and details about the risks to unrepresented parties.
The remaining five issues, which the BCFSA found between 19 to 25 instances of, were as follows:
6. Managing broker did not ensure that the service agreements are amended to meet the content requirement outlined under this section of the rules. (Rule 43)
7. Negative balances in trust accounts and trust records were evident and appropriate action was not taken. (Rule 73)
8. Managing broker did not ensure that payments to third parties on behalf of licensees are withdrawn directly from a commission trust account. (RESA Section 31)
9. Managing broker did not ensure that the licensee promptly provide written disclosure under Rule 56 to the client regarding any remuneration to be received from anyone other than the client. (Rule 52-56)
10. Managing broker did not ensure all brokerage trust accounts are designated as such in the records of the savings institution and the brokerage. (RESA Section 26 and Rule 72)
The BCFSA conducts audits to ensure brokerages are in compliance with the Real Estate Services Act (RESA) and various rules and regulations that are in place to protect real estate consumers. The goal is to "ensure that each licensed brokerage has proper controls in place to protect trust monies at all times, identify any deficiencies in the office operations and books and records required by RESA, and provide constructive feedback to support the brokerage to fully comply with all legislated requirements."
According to the BCFSA, new real estate brokerages are audited within the first year of operation, and then all brokerages are visited and audited on an ongoing basis. Audits can be triggered by serious concerns, such as a complaint or disciplinary actions, but can also be triggered by more mundane reasons, such as a new managing broker or outdated audit history.
Following the on-site audits, managing brokers are provided a written report outlining the findings and are then required to respond in writing and outline the steps that will be taken to correct the issues.
In cases where there are serious deficiencies found during an audit, the case could be forwarded to the BCFSA's Market Conduct Department, where the Superintendent of Real Estate will decide on disciplinary action, which could take the form of suspending licenses or fines of up to $250K for individuals and $500K for brokerages.
It does not appear that any such serious deficiencies were found in this audit.