Doorstep lender warns customers surge in mis-selling claims will break firm

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Provident Financial has written to 4.3 million customers warning that its consumer credit division could collapse into administration unless they agree to a sharp reduction in compensation payments for mis-selling.

The doorstep lender also revealed it was facing a regulatory investigation by the Financial Conduct Authority into a string of issues including whether it carried out proper affordability checks before lending to borrowers.

Shares in Provident Financial fell 28% after the announcement on Monday, making it the biggest faller on the FTSE 250.

Provident said profits had been affected by the Covid pandemic and a rise in complaints against its consumer credit division (CCD) by claims management companies that lodge grievances on customers’ behalf. It made £25m worth of payouts in the second half of 2020, comparedwith £2.5m in the same period in 2019.

It is now proposing to ringfence £50m for a scheme that will assess claims on loans issued under its Provident brand and Satsuma between 2007 and17 December 2020. A further £15m will be used to cover the costs of running the programme, which will be open to an estimated 4.3 million former and current customers, including 380,000 existing borrowers. Provident claimed the scheme would ensure a “fairer and more equitable outcome” for customers, but said compensation payouts “may be significantly less than the amount claimed”.

Customers will be asked to vote on the proposal, which will also need to be approved by the courts. But if the scheme is not approved, it is likely that CCD will be placed into administration or liquidation, Provident said.

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The company, which dates back to 1880, is the latest high cost creditor to warn of its potential failure due to a jump in customer complaints being held up by the Financial Ombudsman Service (FOS).

A similar scheme is being proposed by the guarantor lender Amigo, which has also said it is facing potential collapse.

Provident, which also operates the credit card business Vanquis Bank and the sub-prime car lender Moneybarn, said it was unclear how administration would affect other parts of the business.

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Sara Williams, the author of the Debt Camel blog, said Provident could tap those more profitable businesses to help pay customers who would otherwise lose out on redress in the proposed scheme. “The Provident scheme looks like a classic case of a lender trying to put the interests of its shareholders before those of its customers,” she said.

“Provident Financial Group is profitable because of its Vanquis and Moneybarn operations. It could choose to use the profits from those to pay the refunds to the Provident doorstep lending customers mis-sold unaffordable loans … but instead PFG wants to offer these customers a very small amount,” Williams added.

The group may face regulatory hurdles in implementing the scheme even if customers vote in favour. Provident said the FCA was assessing the proposal and had already raised a “number of concerns”.

“The FCA has made it clear that it will not support the scheme for a number of reasons including, in this specific case, because redress creditors will receive less than the full value of their claims,” the group said.

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Provident said it hoped to resolve the FCA’s concerns before its first court hearing, but said customers were unlikely to be prevented from making their own decision.

The FCA declined to comment.

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The high cost lender is facing another FCA investigation based on whether it properly assessed whether loans it offered in the 12 months to February 2021 were affordable and sustainable for borrowers. The group is also being investigated over the way it applied a ruling by the FOS in February about how the company has been handling complaints.

The launch of an investigation does not mean the firm has been found to have breached any rules, the company stressed.

Provident said it “intends to work closely” with the FCA in the coming months, including on the investigation, which is likely to continue until 2022.