Paul Smith is better placed than most executives to talk about the dire financial straits facing families at the bottom of the wealth pile.
Brought up in the 1970s, his family relied on doorstep loans firm Provident Financial throughout his childhood.
Now, following the shock withdrawal of ‘the Provvy’ from doorstep loans earlier this month after 140 years, Smith runs the company set to take on its mantle as the biggest lender in the market.
‘If it had not been for the Provident, my brothers and sisters and I would not have gone to school in decent clothing and could not have had a Christmas,’ says the chief executive of Morses Club, visibly impassioned.
His father John was a dustman and his mother Lynne a factory worker.
‘They didn’t really have two pennies to rub together,’ says Smith, 54. ‘Unlike other chief executives in this industry, my parents used the Provident to clothe me and my five siblings in a three-bedroom council house in Birmingham.
‘They used them for every Christmas and every school uniform the six of us ever wore,’ he adds in his Brummie accent
The Provvy’s demise, revealed by The Mail on Sunday, has sent shockwaves through the high-cost credit or ‘sub-prime’ loans industry, which has been hit by a crackdown from the Financial Conduct Authority (FCA) on borrowers who ‘habitually’ rely on expensive loans.
A deluge of customer complaints poured in – many drummed up by the same claims management firms that drove the PPI compensation bonanza.
A vast number of those cases have ended up with the Financial Ombudsman Service finding in the borrower’s favour. Facing thousands of complaints, Provident set up a mis-selling redress scheme before deciding to throw in the towel.
Now, there are fears that doorstep loans go the same way as payday lenders – and disappear in a blast of tough regulations. In a blistering attack on the FCA, Smith says firms such as the Provvy are being driven out of the market by a lack of proper – and fair – oversight.
The result, he warns, will not be safer lending. Instead, it will be borrowers falling into the arms of loan sharks and criminal gangs.
‘I’m worried about the sector and I’m worried about the community the sector serves,’ Smith says. ‘I understand this market and the customers. I also understand the dangers that exist and how predatory illegal money lenders are.’
Doorstep loans are typically small sums to tide families over and involve a lender calling at the borrower’s home to collect repayments – often in cash.
Lenders typically charge high interest rates – a £300 Morses loan borrowed over 35 weeks at 75 per cent interest would mean repaying £525 in total at £15 a week. Rates have to be higher because this is higher risk, labour-intensive lending, Smith argues.
Unlike Provident, Morses club loans has ridden out the regulatory storm thanks to its use of technology to ensure borrowers can afford their loans, including systems that analyse historic loans. It even made a profit last year, albeit small at £6million.
But Smith reveals the pandemic has restricted operations so severely for many of his smallest rivals that one in three has now quit the market altogether. ‘Before Covid, this market had 400 small family-run businesses and 138 of them have already gone bust,’ he says.
The exodus could not have come at a worse time, Smith says. He predicts demand for doorstep loans is about to explode from £1.2billion to £1.5billion a year, with potential customer numbers rising from 1.6million to 2.5million.
FCA research shows many borrowers are turning to ‘friends and family’ instead of doorstep lenders.
But, Smith warns, many of these ‘friends’ are actually illegal lenders who groom families in need. ‘It’s an insidious process,’ he explains. ‘The illegal money lender finds the victim at the school gates, the laundrette, the pub, a bookies.
‘Wherever it might be, the victim comes to believe this illegal money lender to be a friend – and they comment on their children and the poor state of their clothing. And they make a friendly offer after opening up a friendly relationship over a number of weeks.
This isn’t an immediate offer – it initially looks like a friendly loan. That’s the little crack they find into which they begin to drive the wedge.’
The result can be a lifetime in deep debt or, worse, victims enticed into prostitution or their children into ‘county lines’ drug dealing.
Smith says seven out of ten victims are women, some of whom are so convinced they have a ‘friend’ that they turn up outside court with banners to protest on behalf of loan sharks who have been hauled before a judge.
He says: ‘The FCA themselves say there are 15million adults in the UK that have zero savings in cash or less than £100. So where is the money coming from genuine friends to lend? It’s non-existent.’
His message is simple: act now to regulate the market with clarity or risk delivering cash-strapped families and single mothers into the hands of criminals.
‘The FCA has presided over some fairly horrendous disasters: London & Capital Financial, British Steel pensions, Micro Bonds, Libor rate setting scandal,’ says Smith. ‘But this one – if it goes the way I think it will – will be the biggest disaster they’ve ever presided over.
‘And no one can say they haven’t been warned a thousand times over – by politicians, peers, trade associations, charities.’
Smith says the FCA rightly drove out payday loans. But it is now standing by as claims firms move seamlessly on to doorstep lending – even though these loans, although costly, do not bear the same hidden fees, penalties and compound interest as payday borrowing.
Analysis by Morses Club suggests the Financial Ombudsman is rubber-stamping compensation payouts for as few as five loans over a decade – a rule he alleges it simply ‘made up’ and is being ‘weaponised’ by claims firms.
He is also adamant that he welcomes regulation – but just wants clarity over the rules. ‘When you talk to the FCA, they will say there are no rules about the number of loans a high cost credit customer can take,’ Smith explains.
He gives the example of a family who takes out a doorstep loan at Christmas five years in a row – much like his parents did.
The MoS put Smith’s allegations to the Ombudsman. A spokesman denied using rigid criteria, saying: ‘We look at each case on its merits.’ The spokesman blamed ‘historic unaffordable lending practices, not decisions from our service’ for the implosion of the doorstep loans market.
A spokesman for the FCA said it ‘has acted to ensure that the standards expected of the industry are upheld’, adding: ‘This includes the need for firms to only lend to customers who can afford to repay.’
But Smith is convinced that damaging mistakes are being made.
He says: ‘If I was the chief executive [of the FCA] I would seek a meeting with my opposite number [at the Ombudsman] and I would talk about the real damage that is being done to the market. Someone needs to break this cycle.’
If they don’t, he says, it is the poorest who will suffer.
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