The doorstep debt collectors deployed by Provident Financial hear varied excuses for non-payment. Piquantly, the UK subprime lender has been reduced to mouthing shamefaced apologies of its own. Steep losses in its home credit division mean no dividends may be payable this year — or any year, if the group does not survive in its current form. Obsolescence can imperil a long-established business swiftly.
The crisis involves debt collectors shunted from self-employed to employed status by “the Provvy”, as it is known to customers. The switch was meant to increase efficiency and reduce compliance risk in a business facing long-run decline. It failed. Collections by the disempowered workforce have dropped to 57 per cent of debts, against 90 per cent before.
The home credit division is expected to make a pre-exceptional loss of £80m-£120m this year. Group profits before tax should drop to about £110m, versus £344m in 2016.
On Tuesday the shares fell 73 per cent, exceptional for a FTSE 100 group. This would have been an overreaction to the woes of home credit alone. The bulk of group profits come from fast-growing Vanquis Bank, supplier of credit cards to customers with bad credit histories. But Vanquis has problems of its own.
Last April, a UK financial watchdog began investigating sales of a product permitting borrowers to suspend payments. The Provvy only disclosed this on Tuesday, though analysts believe costs may be material. Regulators could, for example, require the lender to repay premiums worth £70m a year. No wonder chief executive Peter Crook resigned.
The Bank of England has barred Vanquis from paying dividends to the parent. That gives the Provvy an excuse to withhold its own dividends. The £200m saving repairs the hole blown in cash flows by home credit, with something left over for any compensation or fines at Vanquis.
The money cannot restore investor trust. UK subprime now represents a better opportunity for start-ups that lend over the phone than a business with 137 years of history and a damaged collections network.
The Lex team is interested in hearing from readers on this subject. Is the door-to-door debt collection business model still viable? Please tell us what you think in the comments section below.