In a sweeping enforcement action, the U.S. Securities and Exchange Commission has charged BMO Capital Markets, a subsidiary of Bank of Montreal (NYSE: BMO), with failing to properly supervise its employees in the sale of misleading mortgage-backed securities. This case highlights ongoing concerns about regulatory oversight and corporate accountability within Canada’s tightly consolidated banking industry.

The charges stem from BMO’s sale of $3 billion worth of Agency CMO Bonds between December 2020 and May 2023. The SEC alleged that the bank provided misleading metrics and collateral descriptions to customers, allowing them to misrepresent the bonds’ risk and structure. To settle the charges, BMO agreed to pay over $40 million in disgorgement, interest, and civil penalties, with the funds being allocated to compensate harmed investors.

According to the SEC’s findings, BMO representatives structured the mortgage-backed bonds by including a small fraction of higher-interest mortgages. This manipulation caused third-party data systems to generate inaccurate metrics about the bonds’ overall composition. These metrics were then presented to customers, painting a false picture of the bonds’ risk profile.

The SEC found that BMO’s supervisory framework was fundamentally flawed. It lacked specific guidance for employees selling these complex securities and failed to implement procedures to review marketing communications for accuracy.

“It is critical that firms have supervisory processes that are customized to their business units,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement. “Had BMO appropriately tailored its supervision… it might have stopped its employees from continuing to use these misleading practices.”

Without admitting or denying the allegations, BMO has agreed to the SEC’s settlement terms. The penalties include $19.4 million in disgorgement, $2.2 million in pre-judgment interest, and a $19 million civil penalty.

The charges against BMO have sparked renewed criticism of Canada’s banking system, which is characterized by heavy consolidation. Unlike the United States, where over 4,500 banks compete for business, Canada has only 40 federally regulated banks, creating a landscape dominated by a few large players. Critics argue that this limited competition fosters complacency and even misconduct.

“Canadian banks and crime go hand-in-hand. They’ve consolidated the industry so much that there’s no room for smaller honest upstarts to get a foothold,” said a financial analyst on X, using the moniker Parrot Capital. “There’s just a few dozen Canadian banks to choose from compared to literally over 4,500 banks in the United States. Corruption is a lot easier when there’s less competition.”

Compounding these concerns is the perception that Canadian regulatory agencies are less aggressive than their American counterparts. The SEC, not Canadian regulators, took the lead in prosecuting BMO’s misconduct. Critics claim that Canada’s financial watchdogs “look the other way” on white-collar crime, a charge that has long dogged the country’s financial oversight system.

This case is far from an isolated incident for BMO, which has faced other controversies in recent years. In 2021, the bank was fined for violating anti-money laundering regulations in the U.S., raising questions about its corporate governance and risk management culture. Such incidents cast a shadow over Canada’s reputation for financial stability, a hallmark of its banking system.

Despite its challenges, Canada’s banking system is often praised for its accessibility and resilience. Over 99% of Canadian adults have accounts with financial institutions, one of the highest rates in the world. Banks also play a critical role in the country’s economy, employing thousands and serving as major lenders to businesses and consumers.

However, cases like BMO’s recent SEC settlement underscore a growing tension between the sector’s public image and its behind-the-scenes practices. Critics argue that the concentration of power among Canada’s largest banks has stifled competition and accountability, enabling a culture where regulatory breaches are seen as the cost of doing business.

As BMO works to restore its reputation, questions remain about whether this penalty will lead to meaningful changes in its internal policies or broader regulatory reform in Canada. The $40 million settlement is significant, but its impact on the $100 billion institution may be limited.

Information for this story was found via the sources and companies mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.