Provident Financial PLC (LON:PFG) is facing a regulatory inquiry into its doorstep credit business after complaints from customers surged during lockdown.
UK regulator, the FCA, is looking into the practices at Provident’s consumer credit (CCD) division between February 2020 and 2021, the company said in a statement today.
Provident Financial itself started an operational review of its CCD business, which comprises the Satsuma and Provident brands, in December after the volume of complaints jumped by 200% in the second half of 2020, which resulted in a cash charge of £25mln or a ten-fold increase on the previous year.
To deal with the complaints and the escalating cost, Provident said it is setting up a scheme of arrangement to ring-fence CCD complaints and protect the rest of the company.
This scheme will cover potential redress claims up until 17 December 2020 said Provident, adding it had been in dialogue with the FCA over the move.
Provident Financial added it will fund legitimate scheme claims with £50mln and will cover further Scheme related costs estimated at approximately £15mln.
If the scheme is not approved, the company said it will likely place its CCD arm into administration. At the end of December, CCD customer receivables stood at £139mln and had reduced further to £118m at the end of February
Provident Financial pointed out that the appointment of investigators does not mean that the FCA has determined that rule breaches or any other contraventions have occurred.
Elsewhere, the statement said trading had been better than expected in the final quarter of 2020 and that underlying profits for the year would be slightly ahead of management expectations.
Hobson's Choice
Claimants have to approve the scheme, which would see them receive around a tenth of any compensation entitlement.
Broker Shore Capital it as Hobson's Choice for both sides: "The alternative, in our view, would be to put the CCD business into insolvency which would likely result in claimants getting nothing and losses to the group being potentially even greater.
"As such, we think the Scheme of Arrangement may be seen as the ‘lesser of two evils.
"A court hearing is scheduled for 22 April 2021 for the Scheme to be approved in principal by a judge and it will then require a majority of claimants to ratify it at a further hearing, which we expect to occur in summer.
"While the FCA seems unlikely to give its blessing for the Scheme, we understand this is not a pre-requisite for the Scheme to go ahead. The Scheme relates to historical lending up to 17 December 2020."
Shares in Provident fell 25% to 196p.
--Amends title, adds comment, share price --