UK: Thinc Of A Number …

Last Updated: 21 May 2008
Article by Nik Carle

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:

  1. applicants' credit histories merited the sale of a sub-prime product;

  2. a good 'match' was struck between the recommended sub-prime mortgage product and the applicants' needs and circumstances;

  3. 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.


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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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