On 22 August 2017, Provident Financial’s share price dropped c 70% after a profits warning. For a FTSE 100 company such large price moves are extremely rare.
The Daily Mail shrieked: Provident Financial goes into meltdown … now 800,000 customers of its doorstep collection business are at risk.
Provident’s doorstep lending re-organisation
Provident’s doorstep loans used to be mainly handled by “agents” – self-employed people, usually living in the area they collected from. In February 2017 in its Prelims, the CEO talked about the stable performance of home credit and announced Provident was re-organising its home credit business to be more efficient:
- 4,500 self-employed agents were being replaced by 2,500 employed staff;
- lending decisions in future would be made centrally, not by the doorstep collectors.
The reorganisation has gone badly wrong
In April Provident had estimated the loss from the transition period to be likely to be an acceptable £15m. Two months later it was saying:
Recent collections performance has deteriorated, particularly through May, and the effect has been reassessed at up to £40m.
But it continued encouragingly:
With the vast majority of new field based roles having been filled, June collections performance is stabilising. However, the switch over to the new operating model in early July will deliver a significant step-up in resource and direct control over the field organisation, including all collections activities. From this point the rate of collections will begin to normalise.
The announcement on the 22nd of August showed that, far from normalising, things have deteriorated further:
- loan collections performance is currently running at 57%, compared to 90% last year;
- new loans are £9 million a week lower than in 2016;
- pre-exceptional loss of the business is now expected to be between £80m and £120m.
The company is blaming problems with the software that schedules visits to customers, with the new debt collectors being sent to the wrong addresses, or the right addresses at the wrong times, or customers being visited by more than one debt collector. There are reports that some of the previous, experienced agents are switching to work for other doorstep lenders, possibly taking their best customers with them.
Why did Provident make this change?
It may sound as though the move away from its traditional agent structure was a foolish move. But Provident probably had little option. The previous operation, where agents had control over credit decisions, could too often lead to irresponsible lending. Far too many people have had Provident loans continuously for many years, with little or no affordability checks being carried out.
Citizens Advice’s Debt on your Doorstep contained some horrific examples of inappropriate pressure on borrowers. Those would have been rare, but the problems I listed on my Can you get a refund of interest on doorstep loans? page were much more common.
Vanquis under FCA investigation
The home credit problems though were at least known about previously, even if the management appears to have badly underestimated the costs and length of the transition period.
But the second major announcement in the August profit warning was not expected at all:
Vanquis Bank is co-operating with an investigation by the FCA into the ROP ancillary product. ROP currently contributes gross revenues, before impairment and costs, of approximately £70m per annum.
ROP is a sort of insurance add on to the Vanquis credit card that makes PPI look like a bargain. It is one of the “traps” of poor credit cards customers should avoid:
if you are paying 50% as your interest rate, this “little extra” will increase it to 66%. And, you pay this monthly fee even if you pay your balance in full every month when you wouldn’t pay any interest at all.
And what will you actually gain? Let’s be honest, your credit rating is pretty rubbish or you wouldn’t have to use one of these cards in the first place, it’s not worth paying to protect. And the kind suggestion that they will freeze interest for two years if you get into difficulties – well even payday lenders would do that!
As this blog says, ROP is:
a double whammy for customers already paying a high price for having “bad credit”.
It’s good that the FCA has concerns about the ROP product and is investigating the period from 2014 to 2016. Vanquis has agreed to suspend sales of the ROP in April 2016.
So far as I am aware, this FCA investigation was news to Provident shareholders. With the revenue being material, you have to wonder if it shouldn’t have been disclosed before.
UPDATE Vanquis made to pay redress
In February 2018 the FCA announced that it found 100% of the ROP sales calls it listened to showed mis-selling, see the FCA’s press release The FCA fines Vanquis £1,976,000 and orders Vanquis to pay £168 million compensation to customers.
Any implications for other lenders?
A lot of people are nervous about the level of borrowing in Britain, looking for early warnings – the so-called canary in the coal mine – that people are starting to default on debts. But the fall in Provident’s doorstep collection rate is not being blamed on over-indebtedness or squeezed household budgets. Instead, it seems to be mostly company-specific, resulting from the botched reorganisation and Vanquis FCA investigation.