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A PIONEER of internet banking has warned that rating agencies might face legal action over their role in the subprime crisis.

Paul Gratton, former chief executive of online bank Egg, described the top ratings given to subprime loan books as a clear sign of control systems in the banking system not working.

Gratton, who led the consortium that recently bought a 75 per cent stake in Scottish mortgage broker moneyQuest, warned that people are likely to sue the big rating agencies.

Gratton, also a former financial services director of First Direct and now executive chairman of moneyQuest, told The Scotsman: "The way banks managed to package some of these 'Ninja' (no income, no job or assets] loans into what people believed from rating agencies to be AAA-rated bundles show real systemic failure.

"I think the next five years will be interesting. It won't be Enron any more. I suspect people will be suing the ratings agencies and investment banks."

On the credit crunch and market turmoil that has spread from the US subprime debacle, Gratton said the real fear was that the UK would talk itself into recession. "The danger is that jittery rumours start to drive sentiment," he said.

"If there is a risk of recession, it is if we talk ourselves into it. While I think there needed to be a correction, there doesn't need to be so much panic."

He said the reaction to Northern Rock was an example of consumers becoming scared. And he claimed the Financial Services Authority (FSA) could have been more vigilant. "I suspect the FSA probably didn't spend enough time thinking the unthinkable. Someone ought to have known what was going on when they saw the rate of growth of Northern Rock in the first half of last year."

He blamed the dramatic fall in HBOS's share price on Wednesday on traders shorting stock and abusing the market and warned this was a further blow to the public having any trust in financial services. However, Gratton claimed he could address this issue by building Glasgow-based MoneyQuest into the "UK's premier advice-based brand".

The company employs about 128 people in Glasgow and Edinburgh and Gratton is on a recruitment drive for mortgage advisers and support staff, despite having taken a majority stake in the firm in the middle of the credit crunch.

He said: "The difficulties people are experiencing in trying to get a mortgage mean they are more in need of a broker now than ever. People need guidance, help and advice. There are still good mortgages out there and we're going to write about 50 per cent more business this month than last.

"moneyQuest has a good track record and reputation with lenders."

Gratton and his management team – some of whom are ex-Egg and First Direct – plan to initially concentrate on expanding the moneyQuest business across the Central Belt. In time, they may open offices in other parts of Scotland.

Souce:  The Scotsman, March 2008