article
Thinc of a number…
20 May 2008
Nik Carle reviews the FSA’s unforgiving investigation against
Thinc Group Ltd and finds that this case will serve as a blueprint
for professional indemnity (‘PI’) claims-making in this sector.
IFA group, Thinc, was last week landed with a whopping £900,000
fine from the FSA for a raft of sub-prime mortgage advisory
failures.
The size of the penalty shows just how serious the FSA is about
clamping down on shoddy practice in this sector.
The FSA’s Director of Enforcement, Margaret Cole, said that its
response here showed the Regulator’s eagerness:
“… to
impose higher fines for serious failings in the retail market and
that poor record-keeping is a serious failure even where, as in
this case, the FSA has not determined that the firm mis-sold
sub-prime mortgages and there have been few complaints.”
The Thinc decision is also likely to attract significant
interest from those involved in sub-prime related PI claims.
The extent to which sub-prime lenders might be regarded as authors
of their own misfortune – when pursuing, for example, shortfall
recovery claims against valuers, solicitors and others – is not yet
clear.
There have been no major reported cases, as yet, in the Courts,
regarding sub-prime lending or advisory behaviour.
Comparisons with the 1990s lender claims experience are not
especially helpful. There was no regulatory dimension to
speak of at that time and this is largely ‘new’
territory.
The Thinc case potentially offers a useful precedent for
handling these sorts of PI claims. With the FSA now leading
the charge, there is scope to use their Principles for Businesses
(“Principles”) as a benchmark for assessing exposure on IFA claims
as well as for prosecuting contributory negligence cases.
Looking at its Final Notice against Thinc, the FSA’s attack
focuses on breaches of:
- Principle 9, which concerns a firm’s obligation to take care
that the advice given to customers is suitable in all the
circumstances; and
- Principle 3, which requires firms to organise and control their
affairs both responsibly and effectively, putting adequate risk
management systems in place.
The Principle 9 failings are of the type that can easily be
adopted and formulated for pleading contributory negligence in
reply to PI claims in this sector.
Record-keeping and audit-trailing is absolutely critical.
In Thinc’s case, the firm just could not demonstrate to the FSA
that:
(a) applicants’ credit histories merited the sale of a
sub-prime product;
(b) a good ‘match’ was struck between the recommended
sub-prime mortgage product and the applicants’ needs and
circumstances;
(c) there had been active consideration of the applicants’
ability to afford the sub-prime mortgage contract.
In some instances, the firm’s ‘Record of Suitability’ letter did
not tally up with the actual product about which Thinc had been
advising.
It was also not clear, in other examples, why Thinc had still
justified the recommendation of sub-prime mortgage when an
applicant’s credit history was historic and might have been
repaired over the passage of time.
Thinc’s files were also weak on the detail of product research
carried out by its advisers. In this sense, it was not clear
why one particular product was chosen for recommendation over
another and some of the research actually shown on file suggested
that a more affordable deal was available to the
customer.
Moreover, some applicants were evidently in full time employment
– or could produce accounts to show income – but they were still
recommended to take on self-certified sub-prime mortgages.
Thinc’s files did not provide any explanation for this
discrepancy.
Also, the FSA found inattention to plausibility issues. In
a number of Thinc’s cases, the applicant’s stated monthly outgoings
were far from convincing in the context of that particular
customer’s sub-prime profile. On other occasions, an
applicant’s monthly outgoings, in terms of the factfind exercise,
was so scant as to make it impossible for the adviser to have
assessed affordability in a proper way.
Concerns were also expressed by the FSA about the short-termist
approach to Thinc’s advice. There was little evidence on the
files of the firm accounting for the applicant’s ability to meet
any extra costs of the sub-prime mortgage product after any
introductory offer rate had expired.
With interest-only mortgages, Thinc also failed to show that an
applicant’s arrangements for repayment of the capital loan had been
considered at any stage.
Comment
All of these are familiar themes in a lender claims setting but
the Thinc case has started to lay a framework for assessing
acceptable sub-prime lending and advisory behaviour. Drawing
on the non-status and centralised lending experience from the 1990s
is not exactly to compare like with like and the FSA’s Final Notice
in this case is as good a start as any for a new guidebook in this
very particular PI field.
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