Its managing director, Paul Smith, knew all this. His parents, a garbage collector and factory worker, had depended on doorstep loans throughout his childhood. “If it hadn’t been for the Provvy, my siblings and I would never have gone to school in decent clothes and couldn’t have made it through Christmas,” he said in an interview. shortly after the withdrawal of Financial foresight (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 relativizes the ethics of unconventional finance. It meets a social need, but it has a price. Home loans depend on agents visiting borrowers’ homes to collect small repayments. The risk and overhead are high and so the equivalent interest rate should be too – up to 500%. Pure exploitation, say critics, who say lenders force loans on people who will never be able 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 crackdown by the Financial Conduct Authority prompted allegations of mis-selling, many of which were confirmed by the ombudsman. financial. Some complaints were genuine, but many were false and it cost suppliers around £750 per complaint to respond to them. It was cheaper to reimburse them than to dispute them, which opened the door to organized touts. The blitz drove Wonga and Amigo into the ground. Provident closed Satsuma, its payday loan arm, and decided home loan was no longer viable.
Morses, however, seemed to be riding the storm. Customers borrowed less during the lockdown, so volumes went down, but repayment rates held up. The Group moved to an operating model that reduced costs by closing offices and increasing digital loans. Its annual report last May spoke of “a transformative year”. The pandemic lockdown had proven the business to be “flexible and resilient” and the chairman was “optimistic about demand for our products and services as the economy reopens”. Lending criteria have been tightened, and although Smith warned the coming months would be difficult, he said: ‘Beyond that, there are plenty of reasons to be excited about the prospects for future growth’ .
In October, the headline for the half-year results was “steady growth and continued business transformation.” An accounting change to IFRS9 had pushed up impairments, and the removal of enhanced universal credit payments was expected to push them up. On the other hand, customer satisfaction remained at 98% and the numbers held steady at around 200,000. But soon after the start of the year, complaints started pouring in from claims management companies. and, on Thursday, February 17, Smith made a fatal error in judgment. Without telling anyone at the Morses Club, he sold shares worth nearly £200,000.
The company found out the next day, and after what must have been a hectic weekend, Morses issued a profit warning: the cost of auditing or paying claims, it said, would cut profits by 20 30% below consensus. Oh, and by the way, Smith had “resigned effective immediately.” He was not fired, which is often code for being fired, and the accompanying press release revealed his stock sale. The share price fell 63% that day, leaving the company’s market capitalization at just £15million, less than a tenth of its value three years earlier. The apparent lack of an investigation into the share sale and its timing added to cynicism about the regulator’s effectiveness.
As for Morses, the new management team is suitably optimistic, which is just as well. High inflation and benefit cuts are fueling the need to borrow, and there are fewer businesses left to respond. Companies like H&T (HAT) or Ramsdens (RFX) are there for those who have something to pawn. Those who don’t could turn to family and friends – but with 15million in this country with no savings and less than £100 in cash, they’re likely to be just as tough.
This leaves vulnerable people open to grooming by new “friends” who turn out to be recruiting for illegal money lenders. History suggests most of the victims will be women, many of whom will struggle to feed their families, and yet an estimated £15billion in means-tested benefits go unclaimed each year because people don’t realize not that they are entitled to it. This suggests government failure. It’s a shame he failed to regulate unconventional finance more effectively a year ago, as Paul Smith suggested, because promoting illegal lending certainly couldn’t have been his goal.