UPDATE On 4 August 2021 the Scheme was approved in court.
See Provident Scheme – 4 million people can now claim a refund to find out how it will work and how to make a claim.
This article gives the background to the Scheme and what happened before voting started.
In March 2021 Provident Financial Group (PFG) proposed a Scheme of Arrangement to reduce the refunds it has to pay to customers. They are the second major lender to seek refuge in a Scheme after the pandemic – Amigo is also proposing one.
The PFG announcement also said that the FCA has started an investigation into Provident’s affordability assessments and complaint handling since February 2020.
PFG says it can’t carry on paying refunds to customers winning affordability complaints about Provident Home Credit loans and Satsuma payday loans. The Financial Ombudsman (FOS) has been upholding 75% of these complaints against Provident;
If the Scheme is not approved, PFG says it is likely that Provident Person Credit Ltd (PPC) which operates the Provident Home Credit and Satsuma brands will go into administration which would mean no cash refunds for customers. In administration, however customers with a current loan would be entitled to balance reductions or write-offs if their claim is upheld.
PFG has two other divisions which will not be affected by the Scheme. Vanquis Bank is best known as a credit card lender. Moneybarn provides high cost car finance.
Outline of the Scheme
PFG has operated Provident Home Credit, Greenwood Home Credit (a small brand no longer used), Satsuma payday lending and Glo guarantor lending (a small brand no longer used) through its PPC subsidiary.
PFG is proposing the Scheme for all these four brands. It wants its PPC subsidiary to be able to carry on in business with new lending products. It has not given any details of these new products.
The Practice Statement Letter (PSL) gives an overview of the proposed Scheme, which will limit the refunds PFG has to pay to Provident Home Credit and Satsuma customers payday loan customers. FOS fees will also be included within the Scheme.
Provident is proposing to put aside £50 million to pay cash refunds in the Scheme. It says customers may get paid 10% of their proper refund. I think 10% is too optimistic, see Provident’s Scheme – will customers get less than 2% ?
The first court hearing for the Scheme on 22 April 2021 approved the voting arrangements. Voting started on 17 May, see Provident Scheme to limit refunds – how to vote on it for details.
Background to the Scheme
Provident started offering Home Credit, also known as doorstep loans, in 1880. It is the dominant lender in this sector of the UK bad credit market.
PFG’s problems began back in 2017 when it reorganised its doorstep lending operation. This went badly wrong with big software problems and sharp drops in the number of debt repayments being collected and in new loans being made, see Provident – home credit crisis for details.
PFG hoped 2020 would be the year home credit returned to profitability. But this plan was derailed by three factors.
1) The pandemic
The pandemic created major problems for all bad credit lenders as the 6-month payment breaks impacted on cash flow and made it hard to assess the numbers of loans that were likely to default.
Provident Home Credit faced additional problems as doorstep collection of weekly repayments was difficult or impossible for much of 2020. Satsuma stopped lending at the start of the first lockdown and Provident tightened its lending criteria, resulting in fewer loans being given.
2) Increasing numbers of affordability complaints in 2020
Many borrowers have had Provident loans continuously for very long periods, often increasing in size – five years is common, ten years is not unusual. An initial smallish doorstep loan often left the borrower too short of money to manage, so the loan was refinanced or another loan was taken. Too many collection agents tended to offer new loans rather than payment arrangements when a borrower was in difficulty.
When Provident loses an affordability complaint it has to refund the interest paid. Where there has been long-term borrowing, these affordability refunds can be very large.
Complaint numbers increasing significantly in 2020 as several claims management companies started advertising on social media. The number of new complaints sent to FOS shows this:
3) Legal/regulatory environment
In March 2020 FOS published a key decision on a case where a customer had 12 loans between 2009 and 2015 upholding loans 4-12 as being unaffordable. FOS uses key decisions to set out in detail why it has made a decision.
In August 2020, the Kerrigan judgment found that a breach of the FCA’s CONC rules on affordability caused an unfair relationship and that a refund of interest paid would be an appropriate remedy. This judgment is in line with the approach FOS takes to affordability complaints.
The same month, the FCA’s Review of re-lending by high-cost lenders said:
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.
Together FOS key decision, the Kerrigan judgment and the FCA re-lending review seem likely to have dashed any hopes Provident had that its doorstep lending could continue as it used to. In May 2020, Provident announced it was closing its doorstep lending operation completely.
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