Treasury guarantees all deposits in failed London Scottish bank

The Government stepped in to guarantee that no retail depositor would lose their money yesterday after London Scottish Bank was forced into administration.

In its first payout on a British bank, the Financial Services Compensation Scheme will cover the first £50,000 held by any retail saver with the doorstep lender. The Treasury rushed to reassure depositors that it would cover any consumer deposits above the FSCS limit, reinforcing the belief that the Government will not let any British savers lose money in a UK-based bank.

The administration was triggered on Sunday night after London Scottish's weak capital position prompted the Financial Services Authority to withdraw its authorisation for the bank to raise deposits. The bank's directors applied to the High Court, which appointed Ernst & Young as administrator.

The administration leaves 723 jobs at risk as Ernst & Young seeks buyers for the business. London Scottish said earlier in the year that it was in talks with potential bidders, and the administrator said some interest remained, but if no buyer is found the business is likely to be wound down.

The Manchester-based bank had about 10,000 savings account holders and total retail deposits of £273m at the end of June this year, suggesting that the Government's outlay may not be large. Wholesale depositors, which are not protected under the FSCS, will be treated as unsecured lenders.

The company's shares were suspended yesterday. They closed at 2.6p on Friday, a fall of 96 per cent this year, giving the bank a market value of just £3.7m.

A big loser will be Royal London Asset Management, which holds more than 12 per cent of the stricken bank. Royal London acquired the holding when it bought United Assurance Group at the start of the decade, and held on to it until the financial turmoil made the shares too difficult to sell.

London Scottish had operated with less capital than the regulatory minimum since the beginning of the year, when the company revealed that the introduction of new capital rules for banks had left it with a shortfall of £13m. The company attempted to plug the gap through disposals, raising £28.5m with the sale of its factoring business in July, but the group still had a capital deficit of £12m at the end of August. The company tried in vain to raise £45m of capital earlier this year.

London Scottish's plight yesterday shook confidence in Cattles, its rival in sub-prime lending, which has applied for a banking licence to secure funding for its loans. Cattles shares fell 11.4 per cent. The FSA will decide by February whether to grant the licence to Cattles, whose capital position is far stronger than that of London Scottish.

London Scottish retail deposits are mainly in fixed-term products and those savers will have to wait until repayment falls due before receiving their funds.

The group offers unsecured loans from £100 to £1,000, which it collects directly from people's homes. It also has a mortgage business, including "right-to-buy" under local authority housing sales.

It had tried to refocus its business on the successful Robinson Way division, which collects debts for companies and public sector bodies, including local authorities and utility firms.

Tom Burton, one of the administrators at Ernst & Young, said the bank would be open for business while looking for a buyer.