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Last week, the FSA announced it was preventing the bank from accepting further deposits as the bank no longer met the regulator's capital threshold conditions. As a result, the failed lender was placed into administration, with Ernst & Young appointed as the facilitators.

In a statement the FSA said: "Eligible retail depositors will be compensated through the Financial Services Compensation Scheme with HM Treasury protecting balances greater than the current UK deposit limit of £50,000. The FSCS will administer the full payout of deposits."

The Manchester-based lender provided loans principally through door-to-door collection as well as mortgage business including right-to-buy under local authority housing sales.

Ernst & Young was unable to comment on what share of the right-to-buy market London Scottish Bank plc had and the Council of Mortgage Lenders, which represents 98 per cent of lenders, confirmed the bank had not been a member.

Bernard Clarke, communications manager of the Council of Mortgage Lenders, said: "We hope mortgage lenders see the benefits of membership and want to join but there is no compulsion on them to do so."

Melanie Bien, director of London-based intermediary Savills Private Finance, said she did not think London Scottish was a huge player in the right-to-buy market and were "inclined to take on anything at a price".

She said: "So the good quality properties were snapped up by Halifax, Abbey, et al, and London Scottish would scoop up the rest at high rates of interest."