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When things go wrong

Its chief executive, Paul Smith, knew all about this. His parents, a dustman and a factory worker, had depended on doorstep loans throughout his childhood. “If it hadn’t been for the Provvy, my brothers and sisters and I would never have gone to school in decent clothing and could not have had a Christmas,” he said in an interview shortly after the withdrawal of Provident Financial (PFG) had left Morses Club as the biggest lender in the market. This market, he said, is far from perfect and he called for proper regulation.

His experience casts the ethics of non-standard finance into perspective. It fulfils a social need, but it comes at a price. Doorstep lending depends on agents calling at borrowers’ homes to collect small repayments. The risk and overheads are high and so the equivalent interest rate has to be too – at anything up to 500 per cent. Sheer exploitation, say the critics, who say that lenders push loans onto people who will be unable ever to repay them.

Payday lenders were their first target. Unlike Morses’ business, payday loans involved hidden costs such as compound interest, fees, or penalties, and a Financial Conduct Authority crackdown provoked claims of mis-selling many of which were upheld by the Financial Ombudsman. Some claims were genuine but many were spurious and it cost providers about £750 per claim to respond. It was cheaper to pay them off than contest them, which opened the door to organised claims touts. The blitz drove Wonga and Amigo into the ground. Provident shut down Satsuma, its payday lending arm, and decided that doorstep lending was no longer viable.

Morses, though, appeared to be riding the storm. Customers borrowed less during the lockdown, so volumes fell, but repayment rates were holding up. The Group switched to an operating model that lowered costs by closing offices and increasing digital lending. Its annual report last May talked of “a transformative year”. The pandemic lockdown had proved that the business was “flexible and resilient” and the chair was “optimistic about the demand for our products and services as the economy reopens”. Lending criteria was tightened, and although Smith warned that the coming months would be tough, he said: “beyond that there are many reasons to be excited about the future growth prospects”.

In October, the half-year results headline was “steady growth and continued business transformation”. An IFRS9 accounting change had pushed up impairments, and the removal of enhanced universal credit payments were expected to nudge them higher. Against this, customer satisfaction remained at 98 per cent and numbers were holding at about 200,000. But soon after the turn of the year, claims started flooding in from claim management companies, and on Thursday 17 February, Smith committed a fatal error of judgement. Without telling anyone in Morses Club, he sold shares worth almost £200,000.

The company learned about this the following day, and after what must have been a frantic weekend, Morses issued a profit warning: the cost of checking or paying claims, it said, would reduce profits to 20 to 30 per cent below consensus. Oh, and by the way, Smith had “stepped down with immediate effect”. He wasn’t thanked, which is often the code for being sacked, and the accompanying media release revealed his share sale. The share price fell by 63 per cent on the day, leaving the company’s market cap at just £15mn – less than a tenth of the value it had been three years earlier. The apparent lack of an investigation into the share sale and its  timing has added to cynicism about the regulator’s effectiveness.

As for Morses, the new executive team is suitable optimistic, which is just as well. High inflation and benefit cuts are stoking the need to borrow, and fewer firms are left to respond. Companies like H&T (HAT) or Ramsdens (RFX) are there for those with something to pawn. Those without might turn to family and friends – but with 15mn in this country with no savings and less than £100 in cash, they are likely to be just as hard up.

That leaves the vulnerable open to grooming by new “friends” who turn out to be recruiting for illegal money lenders. History suggests that most victims will be women, many struggling to feed their families, and yet an estimated £15bn of means-tested benefits go unclaimed every year because people don’t realise they’re entitled to them. That suggests a failure of government. It’s a shame it failed to regulate non-standard finance more effectively a year ago, when Paul Smith suggested it should, for the promotion of illegal lending surely can’t have been its goal.