Ernst & Young is preparing to sell Robinson Way, London Scottish Bank's profitable debt collection business, after being appointed to run the failed sub-prime lender and savings provider yesterday.

It is understood that the administrator is preparing an information memorandum to send to interested bidders and will formally auction the business within weeks.

A number of private equity and trade bidders are believed to have expressed an interest in Robinson Way, which made a profit of £6.3 million in the six months to October 30.

London Scottish was forced to call in the administrators after it failed to fill a huge shortfall in funding and could not find a buyer. The Financial Services Authority (FSA) ruled that the bank could no longer take deposits in light of the failure to secure its future.

The Government has guaranteed the deposits of thousands of customers with London Scottish, which has become the first British bank to go bust as a result of the credit crunch.

The Treasury has promised 10,000 customers that all deposits in the bank will be protected, including those over the £50,000 limit guaranteed by the Financial Services Compensation Scheme (FSCS). There are 600 customers with more than £50,000 in savings with the bank and it holds more than £250 million in deposits.

The Manchester-based bank specialises in unsecured “doorstep” loans between £100 to £1,000, which it collects by visiting customers at home. It has a sub-prime mortgage business and offers debt collection services. It used its savings business to part-fund new lending with fixed-term savings accounts.

It is unclear what will happen to the group's borrowers, although the FSA emphasised that they should continue with repayments until further notice.

At the beginning of the year London Scottish had 52 branches across the UK, but it has since closed 48 branches and made about 330 staff redundant. In the six months to April the bank reported widening losses from its consumer credit business and bad debts in the division left it nursing a regulatory shortfall, which had been revealed late last year.

Its underlying pre-tax loss in the six months to April 30 stood at £7.4 million. Shares in the group were suspended yesterday at 2.62p. The bank said that a number of suitors remained interested, although more than 700 jobs are now at risk.

A handful of lenders dominate the doorstep lending market market, according to the Competition Commission. London Scottish was the third-largest provider, behind Provident Financial and Cattles.

London Scottish offered sub-prime mortgages linked to three-month Libor, the interbank money market interest rate, at rates that would be regarded as highly uncompetitive to most borrowers. Last year it was offering deals with rates of up to 5.22 per cent above Libor.

Debt charities have given warning that the exit from the market of one of the big providers of sub-prime debt could lead to even higher rates. The number of sub-prime mortgage lenders has fallen substantially in the past year, from about 30 to only five, according to Moneyfacts.co.uk, the financial website.

Frances Walker, of the Consumer Credit Counselling Service, a debt charity, said: “The options for borrowers with bad credit histories or CCJs are extremely limited and if they can't find a reasonable sub-prime doorstep lender the options are even more unsavoury.”

The FSCS said that it would collect savers' details from administrators today and would contact customers as quickly as possible.

The rise and fall of a northern institution

— London Scottish Bank began life in Wigan at the turn of the last century. Seeing a gap in the market, Lewis Livingstone set up a money-lending business to provide small, short-term loans to the mill workers traditionally ignored by big banks

— By the mid-1930s Livingstone and his son Harry had built up the Manchester-based Refuge Lending Society Limited, with seven branches across Lancashire

— By the end of the 1960s, Refuge had expanded to London

— Refuge floated in 1970 and acquired Robinson Way, a debt collection agency, in 1975

— The increasingly diverse nature of its activities and the opening up of the UK banking sector led Refuge to change its name to London Scottish Bank in 1986. Between 1988 and 2004 LSB made a series of acquisitions, including a move into mortgage-secured lending with the purchase of Prime Finance, a sub-prime lender and loan packager, in 2003

Q&A

Why did London Scottish go into administration?
At the start of the year the bank had a capital shortfall of £13million and told investors that it was looking for a cash injection of about £45million. On Sunday it admitted it was unable to find either the capital or a buyer

I have savings with London Scottish - are they safe?
The Financial Services Compensation Scheme (FSCS) guarantees all deposits up to £50,000, and the Treasury has promised to top-up the scheme to ensure that 600 savers with deposits larger than this will also be compensated in full

How will savers get their money back?
The FSCS will write to all depositors over the coming weeks to explain how savings are to be refunded. Yesterday it said that it would pay compensation to customers with fixed-term accounts as quickly as possible after the date of maturity covering their deposits plus interest owing. For more information contact the FSCS on 020 7892 7300 or see fscs.org.uk

What now for sub-prime borrowers?
There has been a decline in the number of lenders in the sub-prime market since 2006, when the Competition Commission said that 430 operators were offering direct loans. There are still a number of players in the doorstep market, including Provident Financial

How much do doorstep lenders traditionally charge?
Provident Financial offers a £300 personal loan with 57 weekly repayments of £9 and a total repayable amount of £513

What is the best sub-prime mortgage deal available?
Rates have increased by about two percentage points in the past year, according to Moneyfacts.co.uk. The best deal is from BM Solutions, owned by HBOS, which is offering a three-year fixed-rate mortgage with an interest rate of 8.29 per cent

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