Provident’s scheme spells the end of the local doorstep lender

If your pitch for social acceptability is that you provide a vital service to those most in need, then cutting customers loose when the going gets tough rather undermines your case.

Provident Financial wants to dump customer complaints related to its door-to-door lending into a scheme of arrangement, capping liability for its shareholders at £50m. 

“The Provvie” — a chummy nickname that belies rates of as much as 1,500 per cent APR for short-term, low-principal loans — has been in the business of providing finance to less creditworthy borrowers since the 1880s. 

But it has been hit by rising complaints, geed up by claims management companies looking for a new raison d’être as PPI business dwindles. Home credit cases at the Ombudsman rose by 200 per cent half on half last year.

The claims companies are earning their fee: 84 per cent of complaints were successfully upheld in the final quarter of 2020. For Provident’s business specifically, the uphold rate was about 75 per cent last year, compared with 38 per cent in the first half of 2018, notes Canaccord Genuity.

The Financial Conduct Authority has already said it won’t support the scheme of arrangement, ahead of an April court date, because customers wouldn’t receive the full value of their claims.

So Provident’s threat to put its home collection business into administration or liquidation, leaving them nothing, looks rather like the type of strong-arm tactics it claims to be saving customers from in the unregulated part of the credit markets.

Either way, this is a business that has had its day.

Provident’s glory years were born out of the hardship of the financial crisis, when risk aversion among the high street banks pushed customers towards its local doorstep lenders. The company’s share price soared as customer numbers rose to 1m. 

A botched reorganisation in 2017 aimed to get ahead of regulation of the sector. Instead, Provident lost previously self-employed agents to its rivals and the consumer credit unit has been lossmaking since. 

It now has, perhaps, 300,000 customers, arguably not enough to support what remains a high-cost, people-based model. The stock, before today, had lost about 90 per cent of its value since its 2017 peak.

The regulatory tide has definitively turned against the model. A court case last year homed in on “relending”, a staple tactic in home collection. The Woolard review also recommended looking at whether those regularly reliant on loans from their friendly, local agent are effectively taking a revolving line of credit and need more protection.

Provident argues that opportunistic professionals are behind rising complaints. But the high success rate, and a new FCA investigation into affordability and sustainability of its lending, suggests some real concerns. Complaints were still accelerating towards the end of 2020; the company must now go back over 4.6m loans made since 2007.

One source of uncertainty for investors — who marked the shares down about 25 per cent on Monday for a proposed scheme costing 10 per cent of the market value — is how the company arrived at its £50m cap against £25m of cash payouts in the second half of last year, and whether that might need to be extended.

Another is the damage that is done to the business in the meantime, in terms of generating new business (which has been a struggle in lockdown), or indeed collecting on the loans outstanding. 

A third is how the move to impose haircuts on the amount low-income customers can receive on their valid complaints plays out, especially as Provident has two other profitable businesses: subprime credit card provider Vanquis and car loans outfit Moneybarn.

Provident has lent to a part of the subprime market that the big banks just won’t touch. But the reality is that its consumer credit unit is effectively winding down: the division’s loan book has shrunk to £118m, against a target of £300m set in 2019.

And fears about loans sharks shouldn’t be a reason to go easy on consumer protection, when a more regulated, almost certainly publicly-subsidised model is a better long-term answer.

For the moment, Provident’s promise of an operational review and a “new customer proposition” risks the company appearing to look for a way to make money from a different group of low income borrowers, just as it distances itself from the last lot.

helen.thomas@ft.com
@helentbiz