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Provident Financial: closing the door on home credit will cap losses

A business reliant on close personal relationships sounds a prime candidate for pandemic-driven closure. But regulators, not coronavirus, have forced Provident Financial to end doorstep lending. Egged on by claims management companies, soaring complaints and liabilities have put an end to the centuries-old practice.

Doorstep lending, or home credit, has been a troublesome business since a failed overhaul in 2017. Regulatory rulings that favoured borrowers concluded affordability checks were too lax, opening a floodgate of claims. These extend as far back as 2007 and include millions of former customers. The regulatory purge confirms an exit that should be welcomed.

High reimbursement costs last year led Provident to enact a scheme of arrangement. This capped compensation payments at £50m in total or roughly a tenth of the potential exposure. The alternative was liquidation.

Closing the division completely will require an additional £100m for redundancies and office closures. The total is steep but net losses from the consumer credit division add up to £250m since 2017, when changes to agent terms led to a collapse in collections and profits. Receivables were just £166m last year, down from more than £600m in 2016. The unit has been weighing on Provident for years.

Without home credit, Provident’s focus will shift to “mid-cost” credit via its Vanquis credit cards and Moneybarn car loans. These target lower-risk, more solvent customers. Interest rates are not as high as home credit, but at 50 per cent they still could attract unwanted regulator attention. Payday and guarantor lending markets have already been effectively dismantled. Still, better visibility on costs and a cap on further losses are both positives. Once the exit from home credit is complete, capital requirements should fall.

Provident hopes it can increase unsecured lending in its existing products, but uptake so far is limited. The low-income customers it targets are exposed to government support measures such as the furlough scheme, which ends in July. Only once these measures end will it become clear whether provisions made for losses at remaining divisions are high enough. Fading regulatory concerns at Provident simply serve to highlight looming economic ones.

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