Savers promised safety net as first bank folds

Dec 2 2008 by Iain Laing, The Journal

ABOUT 10,000 savers are to be rescued by a UK compensation scheme after London Scottish Bank became the first British bank in the economic crisis to go into administration.

The Treasury gave assurances that all savers eligible under the Financial Services Compensation Scheme (FSCS) are protected – including those with deposits above the £50,000 maximum.

London Scottish holds more than £250m in savings deposits and 600 of its customers have at least £50,000. More than 700 jobs are at risk. The Manchester-headquartered bank said it had been forced to call in administrators at Ernst & Young after a shortfall in regulatory capital.

The group offers fixed-rate savings accounts and lends to people with poor credit histories, as well as running a debt collection business.

The Treasury said it had “taken decisive action to protect the interests of retail depositors and wider financial stability”.

The FSCS will now contact depositors to give information on the compensation timescale, but promised it would “do everything it can to get people their money back quickly”.

London Scottish had been hoping to secure a sale after it struggled with a multi-million-pound hole in the capital it is required to hold by regulators. The bank said potential suitors remained interested, but it had been forced to go into administration with no certainty of any offer or that the capital shortfall would be met.

The Financial Services Authority on Sunday ruled the bank could no longer take deposits in light of failure to secure its future, leading to an administration order being made just before midnight.

Shares in the group were suspended yesterday at 2.62p, having lost almost all their value in the past year. The group offers unsecured loans from £100 to £1,000, which it collects direct from people’s homes. It also has a mortgage business.

At the end of April it had £274m in customer loan accounts. It is unclear what will happen with borrowers, though the FSA said they should continue repayments until further notice. Most of the bank’s business is run through its debt collection arm, Robinson Way.

The compensation for savers marks the latest drain on the UK FSCS fund after recent claims for customers of failed Icelandic banks Icesave and Kaupthing.

The FSCS, funded by levies on the financial services industry, said it was being given a Treasury loan to fund the claims. But the Government will pay top-up compensation over the £50,000 limit.

Customers can contact the FSCS via its website or by phoning (020) 7892-7300.