Market Financial Solutions (MFS), a London-based mortgage provider, recently collapsed into administration amid fraud allegations, leaving major lenders to MFS like Barclays facing potential losses of up to £2 billion.

Court filings allege that MFS double-pledged collateral to multiple lenders, which means taking multiple loans with the same asset as collateral - if the lenders have to then sell the collateral to recover their loan, some will end up with nothing as the collateral is not enough.

At the same time, MFS heavily financed a Bangladeshi politician who had built a UK property empire worth almost £300 million despite only declaring a wealth of just over £2 million. The National Crime Agency had frozen most of his properties last year.

This collapse worryingly exposed that these major banks felt comfortable lending billions without properly checking whether MFS’ collateral existed or whether it had been pledged elsewhere. This represents a major due diligence failure as these lenders instead focus on attaining the highest yields.

JPMorgan’s CEO, Jamie Dimon, warned earlier that his rivals are doing the same ‘dumb things’ that resulted in the 2008 financial crisis, and the similar fraud cases of First Brands and Tricolour support this suggestion of a systematic problem emerging.

What does this mean for financial services?

• Private credit will face more regulatory scrutiny regarding due diligence standards and verification of collateral

• Asset-backed lending models without independent verification have become very vulnerable to fraud

• Multiple fraud cases of late suggests competition is overwhelming risk management, particularly with Wall Street lenders