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Viewing cable 08LONDON1457, BANKS STOPPING UK SUB-PRIME LENDING

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Reference ID Created Released Classification Origin
08LONDON1457 2008-05-27 07:17 2011-08-26 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy London
VZCZCXRO3501
RR RUEHBL RUEHED
DE RUEHLO #1457/01 1480717
ZNR UUUUU ZZH
R 270717Z MAY 08
FM AMEMBASSY LONDON
TO RUEHC/SECSTATE WASHDC 8742
INFO RUEHED/AMCONSUL EDINBURGH 0935
RUEHBL/AMCONSUL BELFAST 1062
RUEATRS/DEPT OF TREASURY WASHDC
RUENMEM/EU MEMBER STATES
UNCLAS SECTION 01 OF 02 LONDON 001457 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN UK
SUBJECT: BANKS STOPPING UK SUB-PRIME LENDING 
 
 
Summary 
------- 
 
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 
regulated. 
 
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 
market. 
 
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. 
TUTTLE