Building Trust: Strengthening Ethical Standards in Canadian Real Estate
November 29, 2024
By Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI
By Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI
|
In the dynamic and high-stakes world of real estate, ethics serve as the foundation of public trust. Real estate professionals manage transactions that often represent the most significant financial decisions in a person’s life, necessitating transparency, fairness, and integrity. While frameworks like the REALTOR® Code of Ethics aim to uphold these values, persistent concerns remain over enforcement variability, conflicts of interest, and insufficient compliance.
Recent measures by the Canada Revenue Agency (CRA) and the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) have intensified scrutiny on the sector. |
Audits by FINTRAC revealed systemic non-compliance with anti-money laundering (AML) regulations, with 61 out of 71 real estate firms audited failing to implement adequate AML policies and nearly 50% neglecting basic client identification requirements—a critical component of AML compliance [1]. Such findings have amplified calls for stronger oversight and more substantial penalties.
Between 2020 and 2024, 17 real estate brokerage firms, including high-profile names like JLL and RE/MAX, faced administrative monetary penalties (AMPs). These firms accounted for 39% of all entities penalized during this period [2]. Meanwhile, the CRA’s focus on non-compliance in regions like the Greater Toronto Area and British Columbia’s Lower Mainland has resulted in $2.7 billion in additional taxes and penalties assessed from April 2015 to March 2023, based on over 75,000 audits [3].
This alarming non-compliance underscores the need for reforms to strengthen ethics and build a more transparent and trustworthy real estate industry. In this discussion, we delve into these challenges and propose actionable strategies to enhance accountability and rebuild public confidence.
This alarming non-compliance underscores the need for reforms to strengthen ethics and build a more transparent and trustworthy real estate industry. In this discussion, we delve into these challenges and propose actionable strategies to enhance accountability and rebuild public confidence.
Figure 1.0
Source: CRA
Why Ethics Matter in Real Estate
Ethical practices ensure fairness, protect clients’ interests, and reinforce public trust in the real estate industry. Given the high stakes of transactions, unethical behaviors—such as misrepresentation, conflicts of interest, and inadequate disclosure—can cause significant financial and emotional harm to consumers. These breaches not only erode trust but also damage the reputation of the entire profession.
The Gallup Survey on Honesty/Ethics in professions consistently ranks real estate agents near the lower end of the spectrum, just above politicians, bureaucrats, stockbrokers, and TV reporters. However, perceptions have gradually improved over time . Similarly, a CREA and Nanos Research Survey highlighted that Canadians value honesty and integrity as the most critical attributes in a REALTOR® . This growing focus on ethical behavior reflects a consumer-driven demand for greater accountability and transparency in real estate.
Ethical practices ensure fairness, protect clients’ interests, and reinforce public trust in the real estate industry. Given the high stakes of transactions, unethical behaviors—such as misrepresentation, conflicts of interest, and inadequate disclosure—can cause significant financial and emotional harm to consumers. These breaches not only erode trust but also damage the reputation of the entire profession.
The Gallup Survey on Honesty/Ethics in professions consistently ranks real estate agents near the lower end of the spectrum, just above politicians, bureaucrats, stockbrokers, and TV reporters. However, perceptions have gradually improved over time . Similarly, a CREA and Nanos Research Survey highlighted that Canadians value honesty and integrity as the most critical attributes in a REALTOR® . This growing focus on ethical behavior reflects a consumer-driven demand for greater accountability and transparency in real estate.
Figure 2.0
Source: Gallups Survey
Figure 3.0
Source: CREA
Framework for Real Estate Ethics in Canada
The REALTOR® Code of Ethics
Developed by the Canadian Real Estate Association (CREA) in 1959, the REALTOR® Code of Ethics is the cornerstone of ethical standards for Canadian real estate professionals. This code has evolved to address new industry challenges while upholding principles such as:
The REALTOR® Code of Ethics
Developed by the Canadian Real Estate Association (CREA) in 1959, the REALTOR® Code of Ethics is the cornerstone of ethical standards for Canadian real estate professionals. This code has evolved to address new industry challenges while upholding principles such as:
- Promoting the best interests of clients.
- Acting with honesty and integrity.
- Avoiding conflicts of interest and maintaining confidentiality.
Table 1.0 Provincial Enforcement Variances
Source: Various regulatory bodies
Recent penalties imposed by regulatory bodies highlight these disparities. For instance:
- Norwich Real Estate Services Inc in British Columbia was fined $156,750 for one violation.
- Global West Realty Ltd. in Ontario faced a penalty of $132,000 for five violations.
Current challenges in upholding ethics
Ethical lapses in real estate undermine trust, harm consumers, and tarnish the reputation of the profession. The following challenges highlight the key areas requiring reform and stricter oversight:
1. Misrepresentation or Dishonesty: Misrepresentation remains a prevalent issue, manifesting in several forms:
Such behaviors damage consumer confidence and the industry’s credibility, emphasizing the need for stricter enforcement and penalties.
2. Conflicts of Interest: Conflicts of interest, particularly in dual agency, pose significant ethical risks:
4. Failure to Fulfill Fiduciary Duties: Agents are obligated to act in their clients’ best interests but may fail through:
5. Transparency Challenges: Blind bidding is a significant ethical concern in real estate:
The absence of standardized bidding practices across provinces undermines consumer confidence, with many jurisdictions still allowing opaque practices.
6. Insufficient Deterrence: Current penalties for ethical violations are often inadequate:
Need for Reform
This highlights the urgent need for comprehensive reforms across provinces. While some have made notable progress in addressing ethical and regulatory challenges, others have only taken initial steps toward change. Among these efforts, Ontario’s Trust in Real Estate Services Act (TRESA) stands out as a transformative initiative and a critical milestone in advancing real estate practices.
Introduced in 2020, TRESA marked a significant overhaul of Ontario’s regulatory framework for real estate. This reform was driven by several persistent challenges, including misrepresentation, conflicts of interest, and inadequate transparency and compliance measures. By addressing these issues head-on, TRESA represents a forward-thinking approach that other provinces can emulate.
TRESA introduced a modernized regulatory framework designed to enhance consumer protection, accountability, and transparency in Ontario's real estate sector. By addressing long-standing issues, it established a new standard for ethical practices and regulatory oversight.
Key Features of TRESA
As TRESA’s implementation unfolds, it offers a valuable framework for provinces seeking to modernize their real estate regulations and build a more ethical industry.
Adopting best practices from other sectors and geographies can profoundly enhance ethical compliance within Canadian real estate. By combining robust accountability measures with comprehensive education, the industry can foster a culture of integrity, transparency, and trust. This approach aligns seamlessly with the mission of organizations like RERC-ARCIC, which are well-positioned to lead such initiatives and set benchmarks for ethical conduct.
Examples of Best Practices
Since the mid-1950’s the Real Estate Institute of Canada (REIC) has consistently led efforts to promote ethics and professionalism among a broader community of real estate professionals. With our own code of Ethics, REIC raises the bar for its Members, and other industry professionals who agree to an even higher level of professional standards and practice that far surpass the minimum requirements for compliance set by jurisdictional regulators. In an interview with the REIC CEO, Don Inouye, he said “members of REIC choose to adhere to a higher standard. Not because it is required by law, rather, they choose to adhere to a stricter code as part of their personal brand and commitment to fostering higher levels of trust with their clients.”
This year, we furthered our commitment by launching the Real Estate Ethics Index, an initiative designed to measure and promote ethical practices across the industry. By setting clear benchmarks, the Ethics Index aims to hold professionals accountable, enhance transparency, and rebuild public trust in real estate.
The Real Estate Ethics Index is a meticulously designed performance indicator system, tailored specifically for Canada’s real estate professionals. Drawing from thousands of data points, our unbiased scoring methodology evaluates ethical standards and initiatives across provinces and territories. Key indicators include:
Ethical lapses in real estate undermine trust, harm consumers, and tarnish the reputation of the profession. The following challenges highlight the key areas requiring reform and stricter oversight:
1. Misrepresentation or Dishonesty: Misrepresentation remains a prevalent issue, manifesting in several forms:
- Exaggerated Listings: Agents may overstate property features or omit flaws, such as advertising a home as "move-in ready" when substantial renovations are required. This practice misleads buyers and erodes trust.
- Non-Disclosure of Material Facts: Failing to disclose issues like mold, structural damage, or zoning violations can result in financial harm and legal disputes for buyers.
- False Advertising: Altered images or misleading descriptions create unrealistic expectations, causing dissatisfaction and ethical violations.
Such behaviors damage consumer confidence and the industry’s credibility, emphasizing the need for stricter enforcement and penalties.
2. Conflicts of Interest: Conflicts of interest, particularly in dual agency, pose significant ethical risks:
- Compromised Neutrality: Representing both buyer and seller makes it difficult to advocate for opposing interests, undermining trust in the process.
- Reduced Transparency: Withholding critical information to benefit one party further erodes confidence.
- Recommending properties that offer higher commissions than those best suited to clients.
- Collaborating with service providers (e.g., inspectors or mortgage brokers) offering kickbacks, leading to biased recommendations.
- Share information with competing buyers or sellers for tactical advantage.
- Exploit insider knowledge for personal gain, such as leveraging financial constraints to influence negotiations.
4. Failure to Fulfill Fiduciary Duties: Agents are obligated to act in their clients’ best interests but may fail through:
- Neglecting Due Diligence: Overlooking zoning regulations or encumbrances, causing financial complications for clients.
- Prioritize Personal Interests: Directing clients to properties owned by associates or purchasing properties intended for clients.
- Rush Deals: Focusing on quick closures instead of negotiating optimal terms, leading to client dissatisfaction.
5. Transparency Challenges: Blind bidding is a significant ethical concern in real estate:
- Inflated Prices: Buyers frequently overbid due to a lack of visibility into competing offers, driving up housing costs.
- Fairness Doubts: Non-disclosure of competing bids raises questions about the legitimacy of the process.
The absence of standardized bidding practices across provinces undermines consumer confidence, with many jurisdictions still allowing opaque practices.
6. Insufficient Deterrence: Current penalties for ethical violations are often inadequate:
- Low Fines: Provinces like Prince Edward Island cap fines at $5,000, which is negligible compared to the financial stakes in high-value transactions.
- Weak Enforcement: Inconsistent penalties and limited public reporting reduce accountability and fail to act as meaningful deterrents.
Need for Reform
This highlights the urgent need for comprehensive reforms across provinces. While some have made notable progress in addressing ethical and regulatory challenges, others have only taken initial steps toward change. Among these efforts, Ontario’s Trust in Real Estate Services Act (TRESA) stands out as a transformative initiative and a critical milestone in advancing real estate practices.
Introduced in 2020, TRESA marked a significant overhaul of Ontario’s regulatory framework for real estate. This reform was driven by several persistent challenges, including misrepresentation, conflicts of interest, and inadequate transparency and compliance measures. By addressing these issues head-on, TRESA represents a forward-thinking approach that other provinces can emulate.
TRESA introduced a modernized regulatory framework designed to enhance consumer protection, accountability, and transparency in Ontario's real estate sector. By addressing long-standing issues, it established a new standard for ethical practices and regulatory oversight.
Key Features of TRESA
- Disgorgement of Profits: Empowers regulators to recover financial gains acquired through unethical practices, effectively eliminating the incentive for misconduct.
- Cooling-Off Periods: Provides consumers with a defined timeframe to reconsider high-pressure decisions, particularly for pre-construction purchases, fostering informed choices.
- Transparency in Bidding: Requires disclosure in bidding processes, reducing the manipulation commonly associated with blind bidding and promoting fairness.
- British Columbia is exploring increased penalties for unethical behavior to strengthen deterrence.
- Alberta has initiated consultations to enhance transparency and accountability, particularly in managing dual agency scenarios.
As TRESA’s implementation unfolds, it offers a valuable framework for provinces seeking to modernize their real estate regulations and build a more ethical industry.
Adopting best practices from other sectors and geographies can profoundly enhance ethical compliance within Canadian real estate. By combining robust accountability measures with comprehensive education, the industry can foster a culture of integrity, transparency, and trust. This approach aligns seamlessly with the mission of organizations like RERC-ARCIC, which are well-positioned to lead such initiatives and set benchmarks for ethical conduct.
Examples of Best Practices
- Leadership Accountability: Require brokerages to appoint compliance officers responsible for enforcing ethical standards and anti-money laundering (AML) policies, ensuring a culture of integrity from the top down.
- Public Disclosure: Develop a national database to list real estate professionals and firms with ethical violations, enhancing transparency and deterring misconduct by exposing repeat offenders.
- Mandatory Ethics Training: Standardize training and recertification every two to three years, focusing on real-world scenarios such as conflicts of interest, transparency in bidding, and AML compliance to keep agents up-to-date on best practices.
- Whistleblower Protections: Implement anonymous reporting mechanisms to encourage the exposure of unethical practices without fear of retaliation, fostering greater accountability.
- Stronger Penalties: Align fines with transaction values and introduce disgorgement of profits to remove financial incentives for misconduct. Impose harsher penalties for repeat offenders and larger firms to ensure meaningful deterrence.
- Ethics Benchmarking: Establish a ratings system similar to ESG scorecards to evaluate and publicly rank brokerages and agents based on ethical adherence, encouraging continuous improvement and competition. REICs Ethics Index is an initiative in this direction.
- Consumer Advocacy: Educate consumers on their rights and provide clear guidance on reporting unethical behavior. Allocate proceeds from fines to support advocacy efforts or establish a consumer protection fund for addressing grievances.
Since the mid-1950’s the Real Estate Institute of Canada (REIC) has consistently led efforts to promote ethics and professionalism among a broader community of real estate professionals. With our own code of Ethics, REIC raises the bar for its Members, and other industry professionals who agree to an even higher level of professional standards and practice that far surpass the minimum requirements for compliance set by jurisdictional regulators. In an interview with the REIC CEO, Don Inouye, he said “members of REIC choose to adhere to a higher standard. Not because it is required by law, rather, they choose to adhere to a stricter code as part of their personal brand and commitment to fostering higher levels of trust with their clients.”
This year, we furthered our commitment by launching the Real Estate Ethics Index, an initiative designed to measure and promote ethical practices across the industry. By setting clear benchmarks, the Ethics Index aims to hold professionals accountable, enhance transparency, and rebuild public trust in real estate.
The Real Estate Ethics Index is a meticulously designed performance indicator system, tailored specifically for Canada’s real estate professionals. Drawing from thousands of data points, our unbiased scoring methodology evaluates ethical standards and initiatives across provinces and territories. Key indicators include:
- Years of Experience: Reflecting depth of industry knowledge.
- Organizational Initiatives: Assessing companies’ efforts to foster ethical practices.
- Designations and Certifications: Highlighting professionals' commitment to continuous development.
- Ethics Training: Evaluating adherence to mandatory and ongoing education.
- Ethical Conduct: Analyzing records of complaints, penalties, and demonstrated integrity.
[1] https://globalnews.ca/news/10414820/canada-anti-money-laundering-agency-gives-failing-grades-to-banks-real-estate-companies/
[2] https://fintrac-canafe.canada.ca/pen/4-eng
[3] https://www.mondaq.com/canada/real-estate/1529190/canada-revenue-agencys-real-estate-tax-audits-yield-$27b-in-additional-tax-penalties
[2] https://fintrac-canafe.canada.ca/pen/4-eng
[3] https://www.mondaq.com/canada/real-estate/1529190/canada-revenue-agencys-real-estate-tax-audits-yield-$27b-in-additional-tax-penalties
Allwyn Dsouza is REIC’s Senior Analyst, Market Research and Insights. He can be reached at [email protected]. Media enquiries can be directed to [email protected]