In my summary of the Provident’s proposed Scheme, published on 15 March, I said I would be looking at some aspects of it in more detail.
The £50m the company is putting up to pay refunds is not nearly enough to pay everyone. The whole point of the Scheme for Provident is that it will cost it less than if it were to pay full refunds.
This article looks at how much customers might hope realistically to get back from the Scheme.
The percentage that is paid out is sometimes called the “pence in the pound” amount. 4% means you are paid 4p for every £ you are owed.
Provident used 10% in its examples
Provident’s Scheme statement includes some examples of what a customer might receive.
In these examples, it assumed that the total of all upheld customer claims to the Scheme would be £500m. The £50m pot of money then means people would get paid 10% of their proper refund value if that assumption is right.
Please note that the above example is not a projection of the actual payment percentage to be paid in the Scheme and is provided purely for illustrative purposes.
But is 10% at all realistic?
Crunching some numbers gives only 1.5%
Numbers are needed for estimates of the possible payout amount. Some of those numbers are known, while for others there is a good indication of the right level. But some figures require an element of speculation:
- the amount of money to be divided. Provident is offering £50m at the moment.
- the number of customers who may have claims. Provident says it is writing to 4.3m customers, current and previous.
- a guess at the number of customers who may claim. Say 20%.
- how many claims Provident will uphold. The Financial Ombudsman (FOS) is agreeing with the customer in 75% of Provident cases.
- an average compensation amount. Allegiant, a claims company that has handled a lot of Provident claims, says their average refund from Provident cases at FOS was £5,303. So say £5,000.
Using those numbers gives 645,000 upheld claims and a total redress amount of £3.4 billion. A lot more than Provident’s illustrative assumption of half a billion.
With £3.4 billion as the total redress amount, a pot of £50m to be divided gives a payout of just 1.5%.
Was the 10% number just invented?
It is possible that Provident just plucked a number out of thin air.
However it has given some information about how it will assess claims in this flowchart. My guess is that it has worked out the assessment process in some detail and it has just removed the key metrics from that flowchart, leaving it rather vague.
In that case, Provident may well have analysed its loans database to work out what the estimated total redress is. If it has, its advisers would probably have suggested using a round number that was fairly close to the calculated one as an illustration.
So perhaps Provident’s number was based on some calculations… but how could they come out with such a large amount?
Is there any way 10% could be realistic?
The assumed number of people claiming makes a big difference:
- say only 10% of Provident customers claim – that looks low but it’s not impossible. Then my estimate of the possible payout would go up to 3%.
- but to get the payout up to 10%, you would have to use a claim rate of only 3% which isn’t at all realistic.
One possibility is that the 4.3million figure for customers isn’t a good starting point because Provident hasn’t kept all their data, so their claims are likely to be rejected. In this case Provident needs to inform people of this.
The only other way to get the payout up to 10% is to either have a much lower uphold rate than FOS does, or have lower redress amounts.
So are some of the metrics in the flowchart decision tree set at levels that will give very different results to FOS decisions?
Provident’s statement says:
Redress Claims will be calculated using a model that has been developed with reference to the 2020 Court decision in the Kerrigan case.
The Kerrigan case looked at the affordability of Sunny payday loans. The judgment was that breach of the FCA’s CONC rules on affordability meant an unfair relationship claim would probably succeed and that the number of loans was relevant. The unfair relationship approach in Kerrigan clearly applies to Provident complaints.
But Sunny loans were generally small and short term – it was common for customers to have more than 20 of them and more than 50 loans in some cases.
Provident loans are much larger and longer-term, so Provident customers tend to have fewer of them.
So the actual loan numbers discussed in Kerrigan do not seem relevant to Provident’s Scheme. If Provident is proposing to use some of the Kerrigan banding to determine claims, that would lead to a much smaller number of complaints being upheld and for fewer loans to be refunded.
Benchmark against FOS
No automated decision algorithm can replicate FOS decisions exactly.
But in administration – a very similar situation to a Scheme – it is normal for the administrators of payday lenders to develop a program that aims to broadly mirror what FOS might do. They do not come up with a program that would systematically refund fewer loans than FOS.
It should be comparatively simple to benchmark an algorithm against FOS. Just take the last 50 FOS decisions and see what the Provident decision would be on those cases.
Conclusion – 10% is a misleading number
So my conclusion is that the “illustrative” 10% figure is misleading for customers. If Provident follows what FOS normally does, then a realistic number is going to be much smaller, possibly about 1.5%.
But is that Provident is planning on upholding a lot fewer loans than FOS would?
If this is what Provident is planning, the FCA needs to explain that it is not an acceptable approach. The FCA should be asking to see the results of a benchmarking exercise against FOS decisions.
I have had to make some big simplifications and assumptions in this article. If Provident provides more detailed figures, I will update this post with them.
What should customers do?
If you are a customer you do not have to do anything at the moment. See Provident proposes a Scheme which has some customer FAQs eg should you cash a Provident cheque? make a complaint now? carry on paying Provident? etc.