• The surge in claims threatens the solvency of the consumer credit division
  • Door lender faces new watchdog investigation

In an unscheduled trading update this morning, Financial foresight (PFG) said fourth quarter results for 2020 will likely be ahead of analysts’ expectations.

What fell short of market expectations, however, was the news that the subprime lender intended to enter its consumer credit division (CCD) into a scheme of arrangement, following an increase in customer complaints. .

Management say the program will allow it to distribute £ 50million set aside in redress for what it describes as legitimate customer claims, a process that will result in additional operating costs of £ 15million. However, the Financial Conduct Authority (FCA) opposed the program in its current form, arguing that creditors could receive less than the full value of their claims.

If the regulator rescinds the plans at a court hearing in April, Provident says the division will likely be “placed under administration or into liquidation,” leaving all customer complaints unfunded. A scheme of arrangement is a temporary, court-approved measure that helps a business restructure its capital, assets, or liabilities.

The effect of this on the Vanquis Bank credit card division and the subprime auto loan arm Moneybarn “would not be significant,” management said, while acknowledging that relationships with customers, suppliers and regulators could be damaged by the episode.

Relations with the latter already seem strained. In addition to news from the possible administration, Provident revealed that the FCA opened an investigation into the affordability and sustainability of Caisse centrale’s lending and claims handling practices during the year through February. . While no rule violations have been determined so far, news that the review is set to last until 2022 is making the headache for investors even worse.

CCD, which serves hundreds of thousands of customers through Provvy’s traditional home loan arm and online-only Satsuma loans, was on track to break even “on a monthly basis” before that Covid-19 hit last year.

But a surge in write-downs has been followed by a surge in complaints in the mortgage market, fueled by what management is calling increased activity from claims handling companies. This translated into payments of £ 25million to customers in the second half of the year, while an additional £ 11million in balance cuts added to the bill.

Echoing 2017 – when an overhaul of the consumer credit division seriously backfired and precipitated a dilutive capital raise – shares of the FTSE 250 group fell 30% on this news to 184p, as investors weighed the prospect of spending the next few months placed in regulatory headache.

The Lesson of the Guarantor Loan Group Amigo (AGGO) which, like Provident, pursued a plan of arrangement after witnessing an increase in ombudsman-backed customer complaints and successful claims, is that high-cost credit promises a rate of return Inordinate internals should be compared with a higher risk of shock.

While the industry’s claims to serve underrepresented client groups are not entirely unfounded, high interest loans rightly come with greater regulatory and policy scrutiny. We have long argued that investors have no choice but to accept this, and even invite oversight.

They are also expected to apply big discounts to the industry’s book values ​​and a big pinch of salt to analysts’ earnings forecasts – which Provident says is 10.9 pence per share for the current year. Hold / avoid.

Last seen IC: Hold, 222p, Aug 26, 2020

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