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Could the recent £900,000 fine imposed on the Thinc Group by the Financial Services Authority be just the tip of the iceberg?

The fine was imposed on Thinc for not having adequate risk management and compliance systems in place for its sub-prime mortgage business. And for failing to take reasonable care to ensure that it had records to prove the advice that its staff gave to customers in relation to the sale of sub-prime mortgages was suitable.

The fine also reflected the fact that even after the problem was identified by an FSA visit in early 2007, remedial action was deemed ineffective and the company’s sales practices and compliance regime didn’t improve

Margaret Cole, director of enforcement for the FSA, said: “The level of fine shows that we are determined to impose higher fines for serious failings in the retail market and that poor record keeping is a serious failing 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.”

Perhaps this latter observation should be seen as a wake-up call to all companies in respect of their compliance regime. Clearly no company sets out to deliberately fall foul of risk and compliance requirements, especially as most have invested significantly in terms of money, time and training to ensure their processes and procedures are providing the necessary protection for themselves and for their customers.

But are they standing back sufficiently to judge whether their efforts are actually delivering what was intended? In the case of Thinc, it would appear not. And it is impossible to believe that there will not be a large number of other companies who are in the same boat of blissful ignorance.

With the benefit of hindsight, it has become only too apparent how obsession with the profit opportunities the sub-prime market offered has clouded the traditional prudence that historically informed lending policy.

Targets

While it is true that sub-prime underwriting does call for a non-standard approach, the simple fact is that in the last few years underwriting in this market has been more driven by sales targets than by sales quality. This has always been a recipe for disaster and is especially the case when dealing with impaired credit applicants.

The ease with which responsible lending can be thrown from the window has never been more apparent than in the case of Northern Rock – the seeds of whose cataclysmic fall from grace were embedded in cavalier lending of monumental proportion.

But although Northern Rock may have been the bank whose fingers were burned, there are others whose fingers are un¬doubtedly charred. Have they yet to be found out? Undoubtedly.

If a bank such as Northern Rock – who for many years traded successfully on the thin line between risk and reward – can implode so dramatically in so short time, it is a fair bet that the less experienced players who moved into this market towards the end of its heyday will be less likely to have robust risk regimes in place.

We have yet to really witness the potential fallout from the self-certification period. We all know how this niche product, introduced for a very specific sector of the market, became quickly corrupted to become the liar’s charter. Here is another sector of the market where applicants who were encouraged or permitted to undertake loans of six or seven times their joint income will now be staring into the face of penury.

My guess is that while the Thinc Group may not have been alerted to its impending problem by customer complaint this is unlikely to be the case for other lenders. Consumer pre-occupation with the concept of mis-selling is likely to mean that lenders and the Financial Ombudsman Service will be inundated with a deluge of such claims in respect of prime as well as sub-prime borrowing.

Flakiness

It is also highly probable that any investigation of the administration that supported the recent wham, bam, thank you ma’am, approach to lending will reveal more than just a little flakiness.

If we examine the recent administrative track record of some of our great lending leviathans, we can be even more convinced of the probability of further fines to come. Not through deliberate deception or dishonesty, but through policies that put profit before prudence, systems that were unable to cope and employees with insufficient experience and knowledge to handle the pressure

Woolwich, HBoS, Abbey, Alliance & Leicester, Bradford & Bingley are all blue chip lenders who have recently found themselves in the eye of the poor administration storm, and they are not alone. Even the once great Cheltenham & Gloucester has been in administrative mayhem. Stripping out expensive personnel to reduce overheads is all very well, but in doing so, many of our lenders who have trodden this path have actually thrown the baby out with the bathwater. It no longer has in place the experience, the commitment or the pride, that would have once got it out of its mess.

So far, lenders’ grief has primarily been manifested in appalling service levels. But what lurks beneath, is the question?

Seconding support from all quarters to bail out hard pressed administrative systems will temporarily get the ship refloated, but it will not repair any superstructure that has been holed beneath the water. As appears to have been the case with Thinc – who may well look back on their £900,00 fine and feel that they got off lightly.

The FSA, still reeling from criticism of its recent failure over the robustness of its policing regime, will be anxious to restore its credibility. That should send quivers of concern round most boardrooms. They will not be out to take prisoners.

Clearly those who have transgressed, when exposed, are simply going to have to face the music and pay up and no amount of retrospective remorse or reaction is going to undo a mis-sold product that has been inadequately administered and recorded.

The Thinc Group’s experience is a call to action to others waiting their turn in the wings. By getting their administrative house in order before the FSA’s storm troopers arrive, it may just be possible to reduce a monumental fine, into simply a heavy one.

Peter Mounty is a freelance writer and director of Communication Plus