Cablegate: Banks Stopping Uk Sub-Prime Lending

DE RUEHLO #1457/01 1480717
R 270717Z MAY 08




E.O. 12958: N/A


1. (SBU) Over the last few months the UK has seen the virtual
closure of its sub-prime market. Market conditions and action by
the Financial Services Authority (FSA) against brokers for poor
lending practices may have caused some banks to withdraw from the
sub-prime market. The Financial Services Authority conducted an
investigation into the sub-prime market and found deficiencies in
all of the major players. Many of the lenders did not even comply
with their own inadequate policies, with some failing to carry out
basic checks on the plausibility of the information supplied by
customers. The investigation led to fines against five companies.
Citi told us its May 19 announcement that it is withdrawing from UK
sub-prime mortgage lending, however, is not the result of the
current turbulence in the UK sub-prime markets, but an internal
assessment that it was not a significant product line for them.
End Summary

Background: The UK Sub-Prime Market

2. (U) There are a number of fundamental differences between the UK
sub-prime lending market and the U.S. market. The most notable
difference is the size of the markets. In a February 2008 press
release, the UK's Intermediary Mortgage Lenders Association (IMLA)
estimated that sub-prime mortgages account for only six percent of
the UK market, in comparison to 20 percent in the U.S. There are
also significant differences in the products available in the two
markets. In particular, products with heavily discounted initial
interest rates that are common in the U.S. are much less prevalent
in the UK. Finally, businesses operating in the UK sub-prime market
are regulated by the Financial Services Authority (FSA), in contrast
to the U.S. where less than half of sub-prime lending is federally

3. (U) Sub-prime lenders bring more than half of UK repossession
orders, despite accounting for only 6 percent of the UK mortgage
market, according to a BBC investigation. The research found that
over 10 percent of the cases were brought by just two sub-prime
lenders, Southern Pacific Mortgage Limited and Preferred Mortgages,
both owned by Lehman Brothers. Actual repossessions rose to an
eight-year high of 27,000 in 2007 and analysts predict that
conditions may deteriorate further this year, in part due to
sub-prime lending.

Sub-Prime Lenders Closing Their Doors

4. (U) Over the last few months the UK has seen the virtual closure
of its sub-prime market. In a speech to the Association of Mortgage
Intermediaries May 15, Jonathan Fischel, Head of Mortgage and Credit
Unions at the FSA, said that the number of sub-prime products has
decreased by around 80 percent since July 2007. The majority of
sub-prime and specialist lenders who relied on wholesale funding has
either pulled out of the market completely or is no longer offering
sub-prime products. Advantage, the British sub-prime mortgage
lender owned by Morgan Stanley, announced it will stop offering
sub-prime loans on June 16 2008.

FSA Levies Fines for Poor Sub-Prime Broker Policies
--------------------------------------------- ------

5. (U) On May 15, the FSA fined Thinc Group Limited, one of the UK's
biggest mortgage brokers, GBP 900,000 for serious failures in its
sub-prime business. The FSA said the Group did not have adequate
risk management and compliance systems for its sub-prime mortgage
business and that it failed to take reasonable care to ensure that
it had records to prove that advice it gave to customers in relation
to sub-prime mortgages was suitable. The fine comes almost a year
after the FSA concluded its original investigation into the
sub-prime market. The FSA's inquiry looked at eleven lenders, which
represent more than half of the UK's sub-prime market, and found
that none of the firms 'adequately covered' all of their responsible
lending considerations in their policies. Many of the lenders did
not even comply with their own inadequate policies, with some
failing to carry out basic checks on the plausibility of the
information supplied by customers. The investigation referred five
companies, including Thinc, for enforcement. Of the other
companies, The Loan Company was fined GBP 31,000, Next Generation
GBP 10,500, and Homebuyers Security Ltd. and Aidan Mortgage
Consultants had their permits rescinded.

The Citi Decision

6. (U) On May 19, Citi announced that its UK consumer operation will
focus on its Citi and Egg brands and stop new lending through its

LONDON 00001457 002 OF 002

Future Mortgages (FM) and CitiFinancial (CF) operations while
continuing to service existing borrowers. Alan Houmann Director
European Government Affairs, told Econoff that Citi's decision came
from internal reasons, rather than the state of the sub-prime

7. (SBU) When Vikram Pandit was named Chief Executive Officer of
Citi December 7, 2007, he moved quickly to restructure the company's
management organization, Houmann said. The old structure involved
product silos with global responsibility for managing each product
resting in New York. Pandit instituted a matrix organization where
regional managers have responsibility for all businesses in their
region thereby cutting across the product silos. Houmann stressed
that Pandit has delegated profit and loss (PL) responsibility down
from New York to the regional managers.
8. (SBU) According to Houmann, the global Citi review will be
completed well before year end 2008. Regional management is
reviewing each Citi business. Each business is labeled either core
or legacy and evaluated based on a panoply of measures, including
growth potential and profitability. Houmann said that given the
small market share of CF and FM, managers at Citi were not surprised
by the decision to shut them down. He said that the decision might
well have been taken even without the sub-prime crisis and should
not be viewed as being caused by it.

9. (SBU) Houmann said that FM and CF were purchased in 2000 and 2001
respectively. Both operate exclusively in the UK. CF is a full
spectrum lender focusing on unsecured personal loans. It currently
has less than a one percent market share. FM is Citi's intermediary
secured loans operation and offers first and second secured loans
through mortgage brokers. FM also has less than a one percent
market share. The Times reported on May 20 that CF operates 49
branches with 300 employees and a call centre in Doxford with 400
employees. Houmann said Citi is working hard to find jobs
internally for the redundant employees, but stressed that the global
review is expected to result in a significant reduction in fixed
costs (read as employees). Accordingly, many of those affected will
likely not find new positions within Citi.

© Scoop Media

World Headlines


Werewolf: Gordon Campbell On North Korea, Neo-Nazism, And Milo

With a bit of luck the planet won’t be devastated by nuclear war in the next few days. US President Donald Trump will have begun to fixate on some other way to gratify his self-esteem – maybe by invading Venezuela or starting a war with Iran. More>>

Victory Declared: New Stabilisation Funding From NZ As Mosul Is Retaken

New Zealand has congratulated the Iraqi government on the successful liberation of Mosul from ISIS after a long and hard-fought campaign. More>>

Gordon Campbell: On The Current US Moves Against North Korea

If Martians visited early last week, they’d probably be scratching their heads as to why North Korea was being treated as a potential trigger for global conflict... More>>


Gordon Campbell: On The Lessons From Corbyn’s Campaign

Leaving partisan politics aside – and ignoring Jeremy Corbyn’s sensational election campaign for a moment – it has to be said that Britain is now really up shit creek... More>>


Another US Court: Fourth Circuit Rules Muslim Ban Discriminatory

ACLU: Step by step, point by point, the court laid out what has been clear from the start: The president promised to ban Muslims from the United States, and his executive orders are an attempt to do just that. More>>


  • Pacific.Scoop
  • Cafe Pacific
  • PMC