An FCA surrender to Provident puts subprime regulation in the dock

Among Provident Financial’s last charitable acts was to supply its own memorial.

Statues of two bowed figures, a customer with hands clasped and an agent studying a ledger, were carved at the lender’s historic headquarters in Bradford by artist-in-residence Gordon Young. The sculptures became property of the local council when Provident moved to a new-build campus in 2010. They now loom over a narrow path between Bradford Crown Court and Eastbrook jobcentre.

Representations of permanence and camaraderie don’t apply to Provident these days. The Financial Conduct Authority on Wednesday gave the company permission to wind up its 141 year old doorstep lending business using a cut-price compensation scheme it finds objectionable.

Capping the compensation fund is “inconsistent with the FCA’s rules, principles and objectives”, the regulator said. Yet by choosing not to raise these “serious concerns” in court it has applied an argument that has long been the mantra of the subprime industry: even the unacceptable becomes acceptable when the alternatives are worse.

There are no easy fixes for high-risk lending. Attempts to apply universal standards have historically been hobbled by the possibility of driving lenders out of a market otherwise populated by criminals. Regulation has consistently failed both borrowers and lenders by retrospectively applying rules while remaining blind to the myriad unintended consequences. Potential remedies from opposite sides of the political spectrum typically involve fanciful ideas about state intervention and chides about the poor’s budgeting skills.

What swung the argument this time was Provident’s threat to put its home credit subsidiary into liquidation. It carried more weight than a similar threat from Amigo, the UK’s dominant player in the niche of guarantor loans, which had its compensation proposal blocked earlier this year following FCA testimony. As a result, Provident customers mis-sold loans will probably get a fraction of the compensation due.

There might yet be a twist. The FCA had said it would not oppose Amigo’s scheme of arrangement only to change tack at the last moment and turn up for the final hearing. But unlike Provident, Amigo had something to lose.

High cost lenders have been hounded in recent years by claims management companies, which switched targets as the racket around PPI was winding down. A flood of complaints pushed Provident into abandoning what was once its core market. More than 1,000 employees lost their jobs as the lending book shrunk to just £42m by the mid year, yet it was a relatively painless decision: the unit had never recovered from a botched restructuring in 2017 under the former chief executive Peter Crook, who mistakenly believed that the jobs of collection agents could be automated.

The damage caused means Provident’s shareholders no longer care about the lossmaking subsidiary. That was not the case with Amigo, whose directors have an ugly but viable business to preserve. Both companies have the wherewithal to offer more compensation according to the FCA but only Amigo finds itself in zugzwang, the chess term for when any possible move worsens its position.

Not only is this rough justice, it makes no sense at the group level. Analysts expect Provident’s credit card and car finance divisions to deliver an operating profit of around £93m this year, whereas Amigo is likely to burn through approximately £80m.

Allowing companies to ringfence subsidiary liabilities will be a topic of consideration for an FCA consultation on restructuring tools, which is promised for later this year. There has also been talk of tougher restrictions on claims management companies, which have been regulated to no great effect since 2019.

Such tweaks would be welcome but none addresses the big problem. The most needy will continue to borrow by whatever means they have. The FCA’s pursuit of Provident helped speed Britain’s biggest subprime lender towards obsolescence yet customers who were mis-sold will receive little in the way of redress, and there’s no plan for what might appear in its place. For those wandering between the court and the jobcentre, it’s not enough to be given some statues to admire.