Failures in lender due diligence, rather than shortcomings in financial regulation, were the principal cause of the collapse of Market Financial Solutions (MFS), according to a new report from Laeceum.
The analysis concludes that the failure of the London-based bridging and buy-to-let lender in February 2026 was avoidable, with institutional funders failing to identify the multiple pledging of property assets used as security for their loans.
Laeceum estimates that between £2.1 billion and £2.5 billion of institutional lending was exposed to double-pledged collateral following the collapse.
The report draws on MFS’s filed accounts, administration court documents and research involving senior private credit professionals to examine how the lender’s funding arrangements developed and why existing safeguards failed to identify the risks.
Among those surveyed, 86% regarded the collapse as avoidable, identifying weaknesses in lender due diligence as a more significant factor than audit quality, market practices or the regulatory framework.
COLLATERAL VERIFICATION UNDER SCRUTINY
According to Laeceum’s examination of court documents, MFS pledged the same underlying property assets to multiple institutional funders, including Barclays, Apollo, HSBC, Santander, Elliott, Wells Fargo, Jefferies and Citigroup.
The analysis suggests that approximately £1.16 billion of institutional lending was supported by just £230 million of verifiable security.
The report also highlights the scale of MFS’s operations relative to its balance sheet. Despite reporting net assets of £15.9 million, the lender was managing a loan book of approximately £2.4 billion.
MFS operated within the Annex 1 registration regime, under which certain non-bank lenders are supervised for anti-money laundering purposes rather than being subject to prudential requirements equivalent to those imposed on banks.
Laeceum notes that the framework imposes no minimum capital requirement, conduct regime or obligation to report loan-book information. However, its research found that practitioners considered inadequate verification by funders a more important cause of the collapse than the regulatory environment itself.
YIELD PRESSURES AND LENDING STANDARDS
The report also examines whether competition for returns contributed to weaker lending controls.
Laeceum calculates that global direct lending spreads narrowed by 172 basis points between March 2023 and December 2025, increasing competitive pressure on institutions seeking to deploy capital.
While respondents acknowledged that tighter margins could encourage less rigorous verification practices, they did not consider those pressures sufficient justification for the failures identified in the MFS case.
Ravi Chauhan, managing director of Laeceum, says: “This collapse was not a failure of regulation. It was a failure of discipline.
“Every piece of information needed to catch the double-pledging at Market Financial Solutions already existed somewhere in the system; it was simply not checked, or was ignored.
“Our analysis shows that the market agrees, and that the fix lenders rate most highly is not new rules but the basics: independent, loan-level verification against the Companies House and Land Registry charges before and during every facility.”
FUNDERS EXPECT TIGHTER CHECKS
The research indicates that changes to institutional lending practices are already under way.
All respondents expect collateral verification standards to become more demanding over the next 24 to 36 months, while 86% report that materially tighter requirements have already been introduced.
However, most participants do not anticipate substantial additional regulation of lenders operating under the Annex 1 framework.
Laeceum’s inaugural Quarterly Point of View report includes an Early Warning Indicator framework intended to help institutional funders identify potential weaknesses in bridging lenders before committing capital.
The framework uses lessons from the MFS collapse to identify warning signs that could be incorporated into funder due diligence. Laeceum is also developing an Annex 1 bridging lender failure propensity model, which it plans to release in the first quarter of 2027.
The findings raise questions for warehouse lenders and other institutional providers of specialist property finance about the extent to which collateral checks should be conducted independently, both when facilities are established and throughout their duration.
Chauhan adds: “The institutions exposed here can absorb the loss. The question this report puts to the market is whether that discipline holds once the memory of this loss fades and whether some aspects of the Annex 1 permissions regime need to be modified.”
