On 15 March 2021 Provident Financial Group (PFG) announced it is proposing 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 – 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.
There are 4.3 million current or former customers who could have a valid claim. PFG will be contacting them by email or by letter. The emails have the subject line “IMPORTANT – Provident SPV Limited Scheme of Arrangement” – some people have reported that they have been put in their junk/spam folder so look out for this.
- 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. There are 4.3million customers who could potentially make a claim for a refund.
- Provident’s illustrative case assumes the total redress liabilities in the Scheme would be £500m, so this £50m would mean customers only get 10% of their proper refund. But I think 10% is a lot too optimistic, see Provident’s Scheme – will customers get less than 2% ?
- There will be a First Court Hearing on 22 April 2021. There is more information below on the proposed Scheme timetable and how it will be approved.
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 probably mean no cash refunds for customers. In administration, however customers with upheld Claims who have a current loan would be entitled to balance reductions or write-offs.
This article looks at the background to PFG’s decision, how the proposed Scheme would work, what it means for customers and the key issues it raises.
What loans are included in 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 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 as yet.
PFG’s other two divisions will be continuing in business and are not affected by the Scheme: Vanquis Bank, best known as a credit card lender, and Moneybarn which provides car finance.
Background – Provident and Satsuma affordability complaints
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.
Provident’s Scheme timeline
The Scheme that is being proposed has to be approved by the Court and also by the creditors that will be affected by it.
All current and previous Provident, Satsuma, Glo and Greenwood customers who took out a loan between 6 April 2007 and 17 December 2020 will be able to make a claim.
The Financial Ombudsman’s fees will also be included in the Scheme so they too will be able to vote on it.
PFG hopes the FCA will not object to the Scheme. It says:
The Company believes it will be able to resolve the FCA’s concerns (apart from their concern as regards Consumers receiving less than full value) prior to the First Court Hearing, but, if any concerns are not resolved, the Company expects the FCA to set out those concerns to the court in writing.
The proposed timeline for Scheme approval is:
22 April – First Court Hearing This decides if Provident’s creditors should vote on the proposed Scheme. The Court will consider the fairness of the Scheme. All creditors covered by the Scheme are entitled to attend – this includes all Provident customers. The hearing will be online.
June/early July – Voting on the Scheme You will be able to vote online on a page that Provident will set up.
Late July – Second Court Hearing This will consider the results of the voting and whether the Scheme should go ahead. If the Scheme is approved at this hearing it will start.
July 2021 – January 2022 There will be a six month period for customer claims to be sent in after the Scheme start date. Provident will then have to assess all claims.
First half 2022 Provident expects payments to be made. I think it may be late in that period as Provident will have to allow time for appeals to be made and reviewed.
What customers might get from the Scheme
Under the Scheme, customers can put in a claim if they were given an unaffordable loan.
Provident will decide whether to uphold each claim:
- it has said what factors it will look at in Scheme Claims Methodology but it isn’t yet clear how this would work in practice.
- Provident will appoint an independent person to look at any appeals. You won’t be able to appeal Provident’s decision to the Financial Ombudsman which most people would prefer to do.
Provident will then calculate the redress on the unaffordable loans – this will be the interest paid on the loans plus 8% statutory interest.
If you have a balance still owing on the last loan(s):
- your balance will be reduced by the refund. This would also happen if Provident goes into administration.
- if you still owe a balance after this reduction, you can make an arrangement to repay it at a more affordable rate;
- if the refund is larger than the balance you will only get a small percentage of the extra amount;
- if your loan has been sold to a debt collector, Provident says it will “work with” the debt collector to try to get your balance reduced but you should assume this may not be possible, so you would get a small refund from Provident and still owe the large balance to the debt collector.
If you are owed a cash refund:
Customers whose loans have been repaid will have their cash refunds paid out of the pot of money Provident is putting aside for this. There will not be nearly enough money in this pot to pay full refunds, so customers will only get a small percentage.
Provident is proposing to put £50m into the refund pot. This will be divided up between the customers who are owed a cash refund – they will all get the same “pence in the pound” percentage of their proper redress.
Provident uses a total redress figure of £500m in its illustrative example. This may be too low or too high, depending on how many people apply for a refund and how many of their loans are upheld. I think it is too low.
If Provident’s £500m figure is right, then customers should receive 10% of the value of their proper cash refund, but I think this may turn out to be under 2%.
FAQs for customers
“I still have a Provident loan – do I have to pay it?”
This loan still legally exists. This will be the case whether the Scheme goes ahead or Provident goes into administration – your loan is not going to disappear. But it may be sensible for you to stop paying Provident in two cases.
1) where the repayments are more than you can afford. You should ask Provident for an affordable payment arrangement now. This applies whether or not you are making an affordability complaint. Provident does not add on any extra interest or charges in this situation.
2) where you have already repaid more to Provident for this loan than you borrowed, or where you had previous loans you also think were unaffordable. Here you should make an affordability complaint (see below) if you haven’t already done so. If you win this complaint, your loan balance will be written off. It may therefore be better if you stop paying Provident now, as for each payment you make from now on you are likely to get back only a small percentage as a refund.
If you are not sure whether to stop paying Provident, talk to National Debtline on 0808 808 4000 or to your DMP firm if the loan is included in your DMP.
“Do I have to do anything now?”
You don’t have to do anything at the moment.
You can decide to attend the first Court hearing by Zoom if you want to, but my guess is most people will not want to do this.
You can register your details on the Secure Page Provident has set up for the Scheme. If you do this, you will be able to see all further communications from Provident there. This will mean there is no danger of you missing an email from Provident, for example if it goes into your spam folder.
“I haven’t made a complaint – should I?”
If this is the first you have heard about refunds from Provident, read Refunds for doorstep loans. That explains what an affordability complaint is and has a template letter if you want to ask for a refund now.
You can do this – the Scheme may not go ahead. But if you send in a complaint now Provident will not be working on it and if the Scheme is approved, you will have to also submit a claim to the Scheme.
“What will happen to my FOS complaint?”
The Ombudsman has said it will pause complaint handling on Provident cases. But if you know you are on a FOS priority list, I suggest you talk urgently to your adjudicator.
So far as I know, if a FOS adjudicator has already upheld your complaint, it is likely that Provident will accept this and payout in full now, before the Scheme.
If the Scheme is approved at the second court hearing, all open FOS Provident and Satsuma cases will be sent back to be decided in the Scheme.
“Will I be able to make a claim to the Scheme if Provident made me a bad offer or rejected my complaint?
Yes. Your claim may again be rejected of course. If it is upheld you will only get a tiny amount of your claim back.
“Should I cash the Provident cheque I have?”
Some people have been sent cheques for refunds on just a few loans, a lot less than is likely to be refunded by the Ombudsman. So they haven’t cashed the cheques as that would be “in final settlement of their claim”.
So now you can cash them – and you probably should!
In the Scheme FAQs, Provident says:
If you have banked the cheque sent to you but do not agree with the settlement offer, you can still submit a new claim in the Scheme, but any compensation already paid to you will be deducted from any compensation calculated in the Scheme.
The only way you can lose out by cashing a cheque is if the Scheme does not go ahead AND Provident then says your case is settled – I think that is incredibly unlikely as they are basically telling you to cash the cheques now so it would be unfair to change their mind.
“Should I vote Yes or No?”
Voting won’t start until after the First Court Hearing. Provident will publish more details before the voting starts. And the FCA or the First Court Hearing could ask for changes.
So it’s too early to decide how to vote. I will write another article on this before the voting starts.
The key issues
I think the key points arising from the proposed Provident Scheme are:
- The Financial Conduct Authority (FCA) hasn’t agreed to the Scheme and may not before the first court date. The FCA is likely to have competition concerns about the impact of the Scheme on other lenders.
- PFG is profitable. Legally PFG can put PPC into administration and walk away from its liabilities to PPC customers, but wouldn’t a responsible lender be prepared to carry on paying the Provident refunds out of the money it is making from Vanquis?
- How will the complaint assessment methodology work in practice? This is key to understanding if Provident’s illustrative total of £500m is realistic. And that matters because it affects the pence in the pound customers may eventually get back.
I will be writing two follow up articles. The first looking at the potential FCA concerns about the Provident Scheme and the second looking at Provident’s estimated Scheme numbers and the refunds customers are likely to get.