Relevant Documents:
FCA Letter April 19, 2021
Provident Response to FCA April 22, 2021
U.K. consumer credit provider Provident Financial has responded to the Financial Conduct Authority’s letter of April 19, following the convening hearing for its scheme of arrangement this morning. Provident says it disagrees with the FCA’s suggestion that there may be scope for the group to increase the level of funding to the scheme compensation fund, currently set at £50 million.
Continue reading for our EMEA Core Credit team's analysis of Prudential Financials' denial that it can increase the level of funding its scheme of arrangement compensation fund, and request a trial for access to the linked documents as well as our analysis and reporting on hundreds of other stressed, distressed and performing credits.
“Financial modelling is multi-dimensional and bearing in mind the requirements of the PRA [Prudential Regulatory Authority], with whom we have also had dialogue, we believe that we can only contribute a maximum of £50 million from capital to the scheme. We therefore remain firmly of the view that the scheme is the fairest compromise that could have been offered to customers with valid redress claims,” the company wrote.
The FCA wrote that it understands Provident intends to increase lending across the group by 30% to 50% over the next three years. The FCA considers that the group's anticipated growth in lending, which is factored into its determination of the compensation fund amount, could reasonably be reduced, which would in turn reduce the funding requirements of the group over that period.
Provident said it is not in a position to give the market guidance on future business growth and, therefore, the various business forecasts set out in the FCA letter should not be regarded as market guidance.
Provident also notes that at the time Provident Personal Credit Ltd., or PPC, (a lending subsidiary) obtained formal authorization in November 2018, the FCA asked for Provident’s assurance that it would support the business. In the four years ended Dec. 31, 2020, Provident and its shareholders contributed about £390 million to PPC. However, as noted in Provident’s
trading update on March 15, the sector dynamics changed the operating environment materially for PPC during the second half of 2020. When combined with the impact of Covid-19 on its profitability, customer complaints could no longer be treated as part of operating costs and this drove Provident's decision to support PPC’s customers as best it could.
Provident also highlighted that it agreed to fund the costs of the scheme, estimated at £15 million.
The FCA letter raised a number of other concerns which were also
raised in court. They include concerns that some customers may vote on the scheme when they are not, in fact, redress creditors, and may be given a vote weighting disproportionate to the actual value of their claims, as well as the fact that some customers may be worse off under the scheme when compared to the position in the counterfactual insolvency.
The company intends to release the scheme explanatory statement by May 17. The scheme meeting is scheduled for July 19 and the sanction hearing for July 30.
--Connor Lovell