From Subprime Star to Losses, U.K.'s Provident Tries to Reboot

(Bloomberg) -- When it comes to subprime lending in the U.K., sometimes the old ways were the best ways.

That’s the hard lesson stockholders in Provident Financial Plc learned as the British lender -- a onetime darling of the FTSE 100 -- struggles to recover from a botched attempt to modernize business practices that could have come from a Dickens novel. The company’s missteps, along with two probes by the Financial Conduct Authority, have triggered a 68 percent slide in Provident’s stock price over the last 12 months.

Now as Provident plans to raise 300 million pounds ($423 million) in a share sale early next month, another challenge looms. The FCA is examining "areas of concern" in the home credit industry, one of Provident’s three main business lines, where agents go door to door to make loans to people with poor credit histories. The agency plans to release its findings in May. If it chooses to cap interest rates and fees -- as it did for the payday lending industry in 2015 -- that could be bad news for Provident. The 138-year-old lender, which has 2.5 million customers in its various businesses, has long dominated the home credit market.

On Tuesday, Chris Woolard, the FCA’s director of strategy and competition, signaled a broader crackdown on the subprime lending industry, which he said is charging too much in fees and interest. “We see a case for intervention in a number of markets, and we are prepared to propose new rules where necessary,” Woolard said in a speech in Glasgow.

Revolving Credit

Provident charges annual interest rates as high as 1,558 percent on 13-week loans of 400 pounds, according to a report from Citizens Advice, an advocacy group funded by the U.K. government. The home-credit industry originates about 1.3 billion pounds a year in loans, according to the FCA.

"There is a big downside to the nature of these loans," said Joe Lane, a senior policy researcher at Citizens Advice. "They are set up as installment loans, but in reality they turn into expensive revolving credit facilities, and if people are repeatedly refinancing loans they are paying high costs."

Recording Conversations

Provident, which declined to make its executives available for interviews, said in its 2017 annual report that the FCA may introduce stricter rules to lower costs for home-credit borrowers. The company said it’s working closely with regulators to ensure that it lends responsibly. Provident is even recording conversations between its lending agents and borrowers and plans to share the audio with the FCA, according to a person familiar with its operations.

From Subprime Star to Losses, U.K.'s Provident Tries to Reboot

For new investors, the prospect of reaping rich returns in Britain’s yield-driven subprime lending industry may be dimming. “The costs of regulation are going up,” said Gary Greenwood, an analyst at Shore Capital Group Ltd., who rates Provident a hold. “In theory, you end up with customers that perform better. At the moment, you see rising costs but you don’t see the benefits.”

Founded in northern England’s textile belt in the 1880s, Provident has long been a fixture in the country’s industrial heartland. It distributed small loans as vouchers called "Provy cheques" that borrowers could redeem for food, shoes, and other goods at local shops. Provident used thousands of self-employed agents to peddle "doorstep loans" to households that couldn’t get credit anywhere else.

The agents, who tended to be women, sized up borrowers by visiting their homes, checking out their living conditions, and looking them in the eye before approving small loans. They typically earned 10 percent commissions, and they had the discretion to let customers slide a week or two when times got tough, or squeeze a little more when borrowers received windfalls, according to John van Kuffeler, who served as the CEO and then chairman of Provident from 1991 to 2013. The agents delivered big profits for Provident -- in 2016, the unit produced 115 million pounds in pre-tax income on 519 million pounds in revenue.

“There is a relationship between the agent and the customer,” said van Kuffeler, now the chairman of Non-Standard Finance Plc, which competes with Provident. “They know and understand each other’s needs.”

By the early 2000s, Provident diversified with a push into credit cards for “near-prime” customers. Soon enough, that leapfrogged the old home-credit business, and Provident’s shares quadrupled in value between 2010 and 2015. With its market capitalization hitting a peak of 5 billion pounds in 2015, the subprime lender entered one of Britain’s most elite clubs: the FTSE 100 equity benchmark.

Eager to build on the momentum, then-CEO Peter Crook overhauled the home credit division last year by replacing the 4,500 freelance agents at the heart of the business with 2,500 "customer experience managers." These salaried employees would wield digital tablets loaded with apps instructing them how to manage collections and pursue leads for new business. The technology was also meant to help “enhance regulatory standards.”

Vanquis, Moneybarn

But disrupting the relationship between lenders and borrowers was a mistake. Not long after the agents disappeared from their weekly rounds last summer, more than 170,000 of Provident’s clients stopped paying their bills. Then came the news that Provident was facing an FCA probe into its credit card unit, Vanquis Bank, and another into its subprime auto lending arm, Moneybarn. Crook stepped down in August, and the company’s shares plunged 66 percent in a single trading day. In November, Manjit Wolstenholme, Provident’s 53-year-old chairman and acting CEO, suffered a fatal heart attack.

Provident’s home credit unit wound up losing almost 119 million pounds in 2017. In February, new CEO Malcolm Le May unveiled a plan called "Rebuilding" and vowed to stabilize the company. Le May settled the FCA’s investigation into Vanquis Bank’s failure to inform 1.2 million customers they had been paying hidden charges going back to 2003.

Next, he said the company planned to raise 300 million pounds in an equity offering, which has the support of its two biggest investors: Woodford Investment Management Ltd. and Invesco Ltd. More than half the fresh capital would go toward paying refunds to Vanquis customers and a 2 million-pound fine to the FCA. Another 20 million pounds was set aside to address the agency’s pending examination of its auto-lending subsidiary.

As for the home credit unit, Le May hired a new management team and brought back some of the agents cut loose last year. But the company is largely sticking with the new tech-driven approach. "It will be a smaller business in the future, but we are at a turning point," Le May said on an earnings call on Feb. 27.

If the FCA does reform the home credit market, its past moves could indicate what’s in store for Provident’s door-to-door lending. The FCA’s caps on payday lenders lowered the average cost of a typical payday loan to 60 pounds from 100 pounds and slashed default rates by a third. Leading player Wonga Group Ltd. saw its sales plunge 64 percent in 2015.

"This was a sea change," said Citizens Advice’s Lane. "Now we would like to see the FCA extend the same type of protections to home credit borrowers.”

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