UPDATE – in November 2023 the Morses Scheme failed – see Morses Club goes under – in administration for details
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Britain’s largest doorstep lender, Morses Club, announced in July 2022 that it was considering a plan to reduce its liability to pay compensation to customers mis-sold unaffordable loans.
The announcement of a possible Scheme of Arrangement would cap the amount of money Morses has to pay in refunds.
It wants a Scheme because it is facing increasing numbers of affordability complaints. It says:
A key objective of a potential Scheme would be to treat all customers equitably and settle eligible Redress Claims over a period to be defined. The Directors believe that a successful Scheme would provide more certainty in respect of the total liability for Redress Claims and help to secure the longer-term stability of the Company…
Whilst the Directors consider that Morses Club has adequate liquidity for the immediate future, they believe that without a potential Scheme, the level of Redress Claims could jeopardise the Group’s future.
Morses Club currently has 144,000 customers. It became the largest doorstep lender after Provident exited the market last year.
Background – what are doorstep loans?
Morses agents visit customers in their homes to set up loans. Some customers pay the loan installments to their agent every week, others pay through the app. Doorstep lending is also known as home-collected credit.
This is a very expensive business model. Even at Morses very high interest rates – 498% APR on a 35 week loan and 343% APR on a one year loan – it is only profitable when a customer borrows more than once.
Research for the FCA has shown how repeat borrowing in the home collected credit market is very frequent:
Some of the home collected credit customers in the qualitative research had been using this form of credit for so long they couldn’t accurately remember when they started. One customer now in his late sixties had started using home collected credit after he was forced to give up work following a major heart attack at 45.
The FCA says:
We have significant concerns that repeat borrowing could be a strong indicator of a pattern of dependency on high-cost credit and levels of debt that are harmful to the customer.
Morses is getting a lot of affordability complaints
A loan is only affordable when it can be repaid and still allow the customer to pay their other debts, bills and living expenses, without having to borrow again. When someone has had several doorstep loans, this is very often a sign that they are unaffordable.
Morses is currently losing 67% of affordability complaints at the Financial Ombudsman. Here is one recent FOS decision where the Ombudsman decided that loans 3 and 4 were not affordable and Morses should refund the interest on these loans:
Mr J had now been borrowing for 15 months without a break and the amounts he borrowed had generally increased. This, to me, points to a sustained and increasing need for this type of credit.
Morses is facing increasing numbers of complaints from claims companies. In February it said:
The cost base of the HCC division has been impacted in recent days by a rapid increase in claim volumes submitted via claims management companies. Given the scale of these complaints, it is anticipated that costs will increase and impact adjusted profit before tax for the current financial year, ending 26 February 2022.
At the same time, it announced that its Chief Executive, Paul Smith was leaving. As the Investors Chronicle reported:
on Thursday 17 February, Smith committed a fatal error of judgement. Without telling anyone in Morses Club, he sold shares worth almost £200,000.
The company learned about this the following day, and after what must have been a frantic weekend, Morses issued a profit warning: the cost of checking or paying claims, it said, would reduce profits to 20 to 30 per cent below consensus.
Oh, and by the way, Smith had “stepped down with immediate effect”. He wasn’t thanked, which is often the code for being sacked, and the accompanying media release revealed his share sale.
How Morses customers would lose out in a Scheme
Schemes are set up to cap the amount a firm has to pay out to a group of creditors. In this case, the creditors are Morses customers who were given unaffordable loans, as they could claim a refund of the interest they paid.
These harm customers in three ways.
Customers normally only get a percentage of the calculated compensation
- the amount people get is described as the pence they are paid for every pound they should have had. This is the same as a %. So if you are paid 30p in the £ that means you are getting 30% of your correct refund.
- refunds and compensation are often called redress,
Looking at recent high cost credit Schemes:
- the Money Shop‘s paid a bit over 5p in the £ – after originally saying it expected to pay about 81p in the £;
- Provident’s Scheme is paying 4.25p in the £ – when customers voted, many thought that would get 10%;
- Amigo Scheme in progress said it may pay 41p in the £ – though in 2023 that was cut to only 17p
Today’s announcement says Morses is making an additional provision of £45m in its accounts for complaints. This isn’t the amount Morses will put into any Scheme. It is impossible to guess at the moment what percentage any Morses Scheme may pay out.
Many customers don’t hear about the Scheme in time to claim
There is a strict time limit on making a Claim – typically 6 months.
Emails about the Scheme may go to an old email address. Or they may be incorrectly identified as spam so the customer never sees them. Letters may go to an old address.
If someone doesn’t find out in time to claim, there is no way for them to make a complaint. The Financial Ombudsman won’t be able to consider one. And you can’t even go to court. A Scheme changes your legal rights so you literally have no way to claim after the Scheme deadline is reached.
Morses will decide which loans are unaffordable in a Scheme
If Morses only uphold a small number of loans, a borrower may have had more upheld by the Financial Ombudsman.
In a recent complaint, Morses only upheld loans 5-9. The first 4 loans were in order £200, £240, £400 and £700. It’s likely that the Financial Ombudsman would have said that the much larger loan 4 was also unaffordable.
Many people have been left very unhappy with apparently random decisions made by Provident in its Scheme. If they want to appeal, they are asked to produce evidence. Provident failed to explain why loans were rejected so it was difficult for the customer to argue against it.
Where there is repeat lending, the Financial Ombudsman doesn’t normally ask a borrower to produce a lot of evidence. The repeat lending itself shows that the customer has become dependent on the loans. This is frequently the case with doorstep lending such as Provident’s and will also apply to Morses.
Schemes have an appeal process. But Provident made this so difficult and their payout is so low that many people gave up.
What happens to current Morses complaints?
Today’s announcement by Morses says:
The Company has provided the FCA with its proposals and is engaging with them regarding a potential Scheme and its future business model.
Importantly it does not say that Morses has asked the FCA to be able to pause complaint handling while a Scheme is set up – the legal jargon for that is called a moratorium.
With no moratorium in place, Morses will have to carry on assessing complaints and the Financial Ombudsman will carry on taking complaints and deciding them. So current complaints should be OK at the moment.
It sounds as if this Scheme is at a very early stage, and getting it approved may be lengthy:
The Company has also taken steps to appoint an independent Chairperson to set up a Customer Committee to represent eligible customers and assist the Company in developing any potential Scheme. Details of any potential Scheme would be announced in due course. The Scheme would be subject to the approval of the requisite majority of affected customers (i.e. those customers who received loans during the period to be covered by any Scheme) and, thereafter, the Court.
I don’t think the FCA should allow a complaints moratorium for a long period. It would leave customers in limbo, unable to progress valid claims. For Amigo this went on for more than 18 months before a Scheme started.