Provident Financial shares fall 26% amid FCA probe

Shares of Bradford-based subprime lender Provident Financial (PFG) fell about 26% on Monday after it announced it is being investigated by the UK’s Financial Conduct Authority (FCA) and said it may have to put its consumer credit division (CCD) into administration or liquidation due to the volume of customer complaints.

The company outlined a £65 million plan to settle the complaints against its CCD business and warned the unit could collapse if the scheme is not approved.

Provident Financial said in a stock exchange statement: “The industry dynamics … have changed the operating environment materially for CCD during the second half of 2020.

“When combined with the impact of Covid-19 on its profitability, customer complaints can no longer be treated as part of operating costs.

“As a result, PFG has decided to pursue a Scheme of Arrangement, under Part 26 of the Companies Act 2006, in relation to potential redress claims arising from customer credit-worthiness complaints based on historic lending at CCD prior to 17 December 2020 and has engaged in dialogue with the FCA to get to this point.

If approved, a Scheme will bring certainty for stakeholders and ensure that customers with a legitimate claim get fair access to redress payments.

“The group will fund legitimate Scheme claims with £50m and will cover further Scheme related costs estimated at approximately £15m.

“The total commitment would be met out of PFG’s existing resources.

The group plans to process all outstanding relevant claims, as well as new relevant claims received before the proposed Scheme is sanctioned, under the Scheme, rather than on an ordinary course of business basis.

“For customers who have not received a Final Response Letter as of today’s date, the relevant claims will be processed under the Scheme.

“For any customer who took out a loan after 17 December 2020 any claims in respect of such a loan will be processed outside of the Scheme.

“PFG believes that handling all outstanding and new relevant claims pursuant to the proposed Scheme in this manner would ensure a fairer and more equitable outcome for all customers, although redress payments ultimately determined may be significantly less than the amount claimed.

“The successful implementation of a Scheme is subject to the approval of the requisite majority of customers with redress claims and the sanction of the Court.

If the Scheme is not approved, it is likely that CCD will be placed into administration or liquidation.

“If this were to happen, CCD customers would not be expected to receive any redress payment.

“Whilst the financial repercussions for CCD would be expected to be substantial, the direct financial or operational repercussions for Vanquis Bank and Moneybarn of an administration or liquidation of CCD would not be significant.

“However, aside from the financial repercussions, the materiality of the wider repercussions of an administration or liquidation of CCD on the relationships of the rest of the group’s divisions with customers, regulators and suppliers would be uncertain.

“Therefore, the proposed Scheme is considered by the PFG Board to be in the best interests of CCD, the group and its stakeholders.

CCD has been engaging with the FCA with a view to ensuring that the Scheme does not raise any regulatory concerns.

“While the FCA has informed CCD of a number of concerns it has with aspects of the Scheme, it has not yet completed its assessment.

“CCD proposes to use the time prior to the first court hearing (to be held on 22 April 2021) to work constructively with the FCA to resolve its concerns.

“In any event, 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.

CCD believes it will be able to resolve the FCA’s concerns (apart from their concern as regards redress creditors receiving less than full value) prior to the first court hearing but, if any remain unresolved, CCD expects the FCA to set them out for the court in writing.

“However, such concerns (if any) are not expected to be of a nature that would prevent customers being given the opportunity to decide for themselves whether or not to support the Scheme, or to oppose it in favour of the alternative, i.e. insolvency proceedings for CCD, notwithstanding any concerns the FCA may have.”

The company added: “Separately, CCD was recently informed that the FCA has opened an enforcement investigation focusing on the consideration of affordability and sustainability of lending to customers, as well as the application of a FOS decision into the complaint handling process, in the period between February 2020 and February 2021.

“The start of the investigation period relates to the FOS decision which was taken in February of last year.

“The appointment of investigators does not mean that the FCA has determined that rule breaches or any other contraventions have occurred.

“The FCA also continues to assess whether CCD is complying, and is likely to comply, with the standards it is expected to meet and the Group’s proposed approach to future lending as and when further details of such proposal are made available.

“CCD intends to work closely with the FCA in the coming months, including in relation to the investigation, which is unlikely to conclude until 2022.”