Provident Financial sees share price recovery, but is this as good as it will get?

Michael Baxter examines Provident Financial and the recent movements

Article updated: 28 February 2018 10:00am Author: Michael Baxter

A year ago, the share price collapsed, it hasn’t exactly recovered, the price is still significantly down on the peak price, but, in the last few days, it has risen sharply. Can the recovery continue?

“I wouldn’t use the word botched,” says Malcolm Le May, CEO of Provident Financial. The company had suffered a disaster, shares collapsed from 3,600p or so in April last year, to less than 600p last August.

It was an attempt at digital transformation that did it. Out went the tried and tested formula of an army of self-employed agents who collected money from the company’s customers, in came automation, and an attempt to do things in-house.
Provident Financial is a subprime money lender, it’s been around since 1880, it made its mark as a so-called doorstep money lender and in recent years its flagship product has been the Vanquis credit card.

Under the previous boss, it had enjoyed quite the run of fortune, shares had risen at a canter, up five-fold since the beginning of the decade. But then that was just a continuation of a trend seen since the days when the company was first listed. Shares were less than 100p back in 1993, less than 20p a few years before that.

The botched move that wasn’t botched

Then things went wrong - under the last boss, Peter Crook, the century old way of doing things was changed. Instead of self-employed door to door agents, whose income was in the form of commission, came a more streamlined in-house workforce supported by technology.

Alas, software had glitches. Many of the agents chose not to go inhouse and fled to rival firms taking their clients with them, and those that stayed complained about software sending them to wrong addresses and all manner of mess-ups.

Shares crashed

“I think the concept is right,” Le May told City AM this week: “I think having an employee-based salesforce is better than having a third-party agency business.”

He continued: “I wouldn’t use the word botched. I think they [the operational changes] were poorly handled.”

Repayment Option Plan

There is more. We are told that the switch led to poor advice, maybe you would call it mis-selling.
It seems that its agents failed to fully explain the costs of its Repayment Option Plan for the Vanquis credit card.
To put it another way: woe built upon woe.

I wonder whether we are too quick to blame digital transformation for the problems with the repayment scheme. Isn’t this just the nature of the beast? There is a narrow divide between ethical, responsible subprime lending, and outright exploitation of the poor, or indeed the cash strapped.

Be that as it may, Provident Financial has come clean. It owned up to errors, raised £300 million via a rights issue, and is forking-out £170 million in compensation.

For once, people who borrowed money from the company are getting a boost, like those chance or community chest cards you get when playing Monopoly – ‘subprime doorstep lender error in your favour, collect some money, and advance to Go’.
Mark Steward, director of enforcement and market oversight at the FCA, said: “Vanquis has decided now to do the right thing by acknowledging the wrongdoing and offering to compensate its customers. We are pleased the firm has extended the compensation to customers who purchased the ROP [Repayment Option Plan] before we took responsibility for regulating the consumer credit market.”

Doing the right thing has gone down well with the markets, as has the company’s efforts to deal with the issue in one go. Shares rose from 588p last week to just shy of 1,000p as I write.

But can the share price return to its once dizzy heights?

There is money in subprime lending - I think it has a lot to do with growing inequality, and I don’t think that this is set to change any time soon.

But, as the 2008 crash showed, as the PPI scandal showed, as the crisis with the Provident Financial Repayment Option Plan showed, there is a lot of risk too - and sometimes, the huge sums of money made by companies that lend to those in financial distress can be considered exploitation, and when it is, things can backfire.

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These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.