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FCA backs Provident Financial payout plan despite 'serious concerns'
14th Jul 2021 10:39
(Sharecast News) - The City regulator has said it will not block Provident Financial's controversial compensation plan for aggrieved doorstep lending customers, despite having "serious concerns" about the scheme.
The subprime lender wants court approval for a scheme of arrangement which will cap compensation payouts for its troubled consumer credit division (CCD).
The Financial Conduct Authority said the scheme was "inconsistent with its rules, principles and objectives", and it was unable to support it. It called the £50m Provident Financial has allocated to the scheme a "potentially arbitrary figure" and noted that while the firm could contribute more, it had decided not to do so.
"The FCA's key concern is that consumers are being offered significantly less than the full amount of redress they are owned," it said.
The letter added: "The group has stated clearly that it does not intend to increase its contribution or share profits with the redress creditors, such that the redress creditors are left with a 'take it or leave it' choice between a very low recovery under the scheme, or a lower figure, if any, in an insolvency."
But despite its concerns, the regulator said it would not formally oppose the scheme in court as a matter of company law.
The FCA said the decision was based on two factors, the risk of potential insolvency - which would mean affected customers receiving even less - and Provident's intention to wind down the unit.
Malcolm Le May, Provident chief executive, welcomed the FCA's decision, saying: "We continue to believe the scheme is far and in the best interests of CCD customers."
The scheme will now be put before creditors in a meeting on 19 July and if approved, the court sanction hearing will take place on 30 July. The scheme requires the approval of 50% of all creditors who vote on it, and the total value of their claims to represent at least 75% of the value of the claims of all creditors who vote.
Should it receive both creditor and court approval, the scheme is expected to become effective from August, with compensation paid by late 2022.
If it does not receive backing from the court, Provident will withdraw financial support for the division and insolvency proceedings will begin.
Broker Peel Hunt, which has a 'reduce' rating on Provident, said: "This is modestly positively for Provident Financial, although loan receivables in CCD have now fallen to £42m, less than the £50m provisions already made, so the risk of additional financial loss has now largely dissipated. We remain cautious on Provident, due to its late recovery characteristics, relatively high exposure to credit trends and tight capital position."
Shore Capital, which in contrast reiterated its 'buy' rating on the stock, said: "While the letter may seem harsh on Provident, we think that it is perhaps also important in acting as a deterrent to any other companies that many be seeking to pursue a similar scheme of arrangement to avoid paying out customer claims in full in future.
"We think today's development materially increases the probability that Provident's scheme will succeed, and thus allow the group to move forward in a positive manner without the need for further investment in the scheme."
As at 1030 BST, shares in Provident were ahead 3% at 249.03p.
The subprime lender wants court approval for a scheme of arrangement which will cap compensation payouts for its troubled consumer credit division (CCD).
The Financial Conduct Authority said the scheme was "inconsistent with its rules, principles and objectives", and it was unable to support it. It called the £50m Provident Financial has allocated to the scheme a "potentially arbitrary figure" and noted that while the firm could contribute more, it had decided not to do so.
"The FCA's key concern is that consumers are being offered significantly less than the full amount of redress they are owned," it said.
The letter added: "The group has stated clearly that it does not intend to increase its contribution or share profits with the redress creditors, such that the redress creditors are left with a 'take it or leave it' choice between a very low recovery under the scheme, or a lower figure, if any, in an insolvency."
But despite its concerns, the regulator said it would not formally oppose the scheme in court as a matter of company law.
The FCA said the decision was based on two factors, the risk of potential insolvency - which would mean affected customers receiving even less - and Provident's intention to wind down the unit.
Malcolm Le May, Provident chief executive, welcomed the FCA's decision, saying: "We continue to believe the scheme is far and in the best interests of CCD customers."
The scheme will now be put before creditors in a meeting on 19 July and if approved, the court sanction hearing will take place on 30 July. The scheme requires the approval of 50% of all creditors who vote on it, and the total value of their claims to represent at least 75% of the value of the claims of all creditors who vote.
Should it receive both creditor and court approval, the scheme is expected to become effective from August, with compensation paid by late 2022.
If it does not receive backing from the court, Provident will withdraw financial support for the division and insolvency proceedings will begin.
Broker Peel Hunt, which has a 'reduce' rating on Provident, said: "This is modestly positively for Provident Financial, although loan receivables in CCD have now fallen to £42m, less than the £50m provisions already made, so the risk of additional financial loss has now largely dissipated. We remain cautious on Provident, due to its late recovery characteristics, relatively high exposure to credit trends and tight capital position."
Shore Capital, which in contrast reiterated its 'buy' rating on the stock, said: "While the letter may seem harsh on Provident, we think that it is perhaps also important in acting as a deterrent to any other companies that many be seeking to pursue a similar scheme of arrangement to avoid paying out customer claims in full in future.
"We think today's development materially increases the probability that Provident's scheme will succeed, and thus allow the group to move forward in a positive manner without the need for further investment in the scheme."
As at 1030 BST, shares in Provident were ahead 3% at 249.03p.