First major failure in UK subprime market

Posted in 'Credit Crunch' by Richard Catlin

08 December 2008

Manchester based London Scottish Bank was placed in administration on 1 December and became a true victim of the credit crunch.

For some time the bank has been seeking a purchaser, and more recently, further equity investment to help bridge the £13m gap in the amount of capital it is required to have available to meet banking regulations on capital adequacy.

London Scottish Bank specialised in providing non-standard credit – i.e. loans to consumers with poor credit histories. Dogged by the lack of liquidity in the funding market and by the performance of its lending portfolio, underwritten in the main by second mortgages over its customers' homes, the placing of the bank into administration is in sharp contrast to the government bail-out of mainstream UK clearing banks.

The bank had an ace up its sleeve in the form of Robinson Way, a debt collection arm that sold its experience in recovering monies to other lenders. This had been held out to be a good counter-cyclical activity – when times get tough for the sub-prime market, debt collection revenues should boom, but clearly this very significant division of London Scottish Bank's business could not bail water at the rate that was needed in current market conditions.

The loss of London Scottish Bank will be a large one for consumers with a less than sparkling credit rating, as the UK has comparatively few providers of 'non-standard credit'. HSBC competes in this area with HFC Bank, Provident, the door-to-door credit people, and Cattles, a much larger lender than London Scottish Bank, these are tipped as the four likely to be in a position to pick up the market share when funding eases.

Although the government did not invest into London Scottish Bank to save it from administration, it did make a surprising announcement that it would go over and above its call of duty to protect the 10,000 savers and investors in the bank. A spokesperson for the Treasury announced, "The Chancellor has put in place arrangements to ensure that all eligible retail depositors in London Scottish Bank will receive their money in full, including those with balances above the current 50,000 pound FSCS limit."

How the collapse will impact on consumers who aren't able to get credit from cheaper, more mainstream lenders remains to be seen however. You can check to see how your own credit file looks on checkmyfile, based on any of the UK's three credit reference agencies, or all three at once.

Even if your credit rating is below average, checking your file will allow you to see when any adverse information is likely to be automatically removed. Timing any application you make for credit to coincide with any improvement in your score could see you get a much better deal than you otherwise might have. Many sub-prime borrowers could have accessed cheaper, mainstream interest rates, had they been in a position to wait a little longer to apply for credit.

Check your credit report now