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The democratisation of consumer credit is a noble aim. Everyone needs a way to borrow to cover, say, unforeseen, household expenses. Yet the recent history of listed lenders to the UK’s subprime constituency suggests it is no longer a sustainable business.
One of the few left, Vanquis — formerly Provident Financial — has tried to clean up its reputation and become a regular bank funded by its depositors. A shock trading update on Monday, which slashed its profit outlook, raises questions about who can lend into this underserved market.
UK nonprime borrowing accounted for about 4 per cent of the consumer credit market in 2013. Following withdrawals including by Provident’s doorstep lending operations and guarantor lender Amigo, that collapsed to about 0.3 per cent last year, estimates not-for-profit Fair4AllFinance. The fear is that those in need instead fall back on illegal money lenders.
Vanquis’s new chief executive Ian McLaughlin, who joined from Bank of Ireland in July, has some explaining to do. Just after his arrival, the bank’s share price dropped a third on surprise loan provisions and an interim loss — apparently because of supernormal loan growth.
Now the problem is customer complaints about its subprime credit card business, via the Financial Ombudsman Service. This is by far Vanquis’s most important division, accounting for all its pre-tax profits in the past two years.
Rising complaints was what prompted other high-cost lenders to exit parts of the market. And Vanquis must be getting a lot of them. Even if most aren’t upheld, administrative costs are increasing. Each FOS submission entails a minimum cost of £750. Based on sharply-reduced profit estimates from analyst, complaints must number no less than 30,000 and likely more than that so far. With the bulk coming from just one claims management company, these are rising weekly.
Next year’s earnings were expected to pick up markedly. Analysts, according to a tally from Visible Alpha, had pencilled in £65mn for 2025. That figure should drop towards £20mn.
McLaughlin had been trying to persuade the City of a new dawn for Vanquis. Instead, the open-ended costs of these burgeoning complaints sent its shares down nearly 40 per cent.
At some point, the financial regulator will need to decide whether it wants the UK’s subprime consumer credit segment to survive the onslaught of professional claims companies — and if not, who should lend to the lower-income people that mainstream banks won’t touch.
For Vanquis, this second wipeout in less than a year makes it untouchable for the foreseeable future.
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