Disclaimer: Paul Smith of the Walruses Club grew up with his family relying on the ‘Provvy’ leaving the market
Paul Smith is better positioned than most executives to speak about the serious financial difficulties facing families at the bottom of the wealth list. Raised in the 1970s, his family relied on home loan company Provident Financial throughout his childhood.
Now, after âProvvy’sâ shock home loan withdrawal earlier this month after 140 years, Smith is leading the company ready to assume its role as the largest lender in the market.
âWithout the Provident, my brothers and sisters and I would not have gone to school dressed in decent clothes and could not have spent Christmas,â says the general manager of the Morrass Club, visibly passionate.
Her father John was a garbage collector and her mother Lynne a factory worker. âThey didn’t really have a couple of pennies to rub together,â says Smith, 54. âUnlike other CEOs in this area, 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 that we wore at six, ” he adds in his Brummie accent.
Provvy’s disappearance, revealed by The Mail on Sunday, sent shock waves through the high-cost credit or “ subprime ” lending industry, which was hit by a Financial Conduct Authority (FCA) crackdown on borrowers who “ usually ” depend on expensive loans.
A deluge of customer complaints poured in – many were beaten by the same claims management companies that led to the PPI compensation bonanza. Many of these cases resulted in a Financial Ombudsman Service ruling in favor of the borrower. Facing thousands of complaints, Provident set up a bad selling remedy system before deciding to throw in the towel.
Today, there are fears that home loans are following the same path as payday lenders – and disappearing in an explosion of strict regulations. In a fiery attack on the FCA, Smith says companies like Provvy are being driven out of the market by a lack of proper – and fair – oversight.
The result, he warns, will not be more secure loans. Instead, it will be the borrowers who fall into the arms of loan sharks and criminal gangs.
âI worry about the area and I worry about the community it serves,â says Smith. âI understand this market and the customers. I also understand the dangers that exist and how predatory illegal money lenders are.
Home loans are usually small amounts to help families and involve a lender calling the borrower’s home to collect repayments – often in cash. Lenders usually charge high interest rates – a loan of Â£ 300 Walrus borrowed over 35 weeks at 75% interest would mean repayment of Â£ 525 in total at Â£ 15 per week. The rates have to be higher because these are higher risk, labor intensive loans, Smith argues.
Unlike Provident, Walrus has weathered the regulatory storm through its use of technology to ensure borrowers can afford their loans, including systems that analyze historical loans. He even made a profit last year, albeit small at Â£ 6million.
But Smith reveals that the pandemic has so severely restricted operations for many of its smaller rivals that one in three has now left the market entirely. âBefore Covid, this market had 400 small family businesses and 138 of them have already gone bankrupt,â he says.
The exodus couldn’t have come at a worse time, Smith says. He predicts that the demand for home loans is set to explode from Â£ 1.2bn to Â£ 1.5bn a year, with the number of potential customers dropping from 1.6m to 2.5m millions.
FCA research shows that many borrowers turn to “their friends and family” rather than home lenders. But, Smith warns, many of these âfriendsâ are in fact illegal lenders providing care to families in need. âIt’s an insidious process,â he explains. “ The illegal money lender finds the victim at the gates of the school, at the laundromat, at the pub, at a bookmaker.
‘Wherever it is the victim comes to believe that this illegal money lender is a friend – and they comment on their children and the poor condition of their clothes. And they make a friendly offer after forming a friendly relationship for several weeks. This is not an immediate offer – it initially looks like a friendly loan. It’s the little crack they find that they start to drive the wedge into.
The result may be a life in debt or, worse, victims lured into prostitution or their children into drug trafficking ‘at the border’.
Smith says seven in ten victims are women, some of whom are so convinced they have a “ friend ” that they show up in court with banners to protest on behalf of the loan sharks who have been dragged before a judge. He says: ‘The FCA itself says there are 15 million adults in the UK who have no cash savings or less than Â£ 100. So where does the money for real friends to lend come from? It is non-existent.
Its message is simple: act now to regulate the market with clarity or risk handing cash-strapped families and single mothers into the hands of criminals.
“The FCA has presided over some pretty horrific catastrophes: London & Capital Financial, British Steel pensions, micro bonds, Libor rate-fixing scandal,” Smith says. “ But this one – if it turns out as I think it will – will be the biggest disaster they’ve ever presided over.
âAnd no one can say they haven’t been warned a thousand times – by politicians, peers, professional associations, charities.
Smith says the FCA has rightly driven out payday loans. But it’s now on hold as claim companies seamlessly turn to home loans – even though these loans, while expensive, don’t carry the same hidden fees, penalties, and compound interest as payday loans. Walruses Club analysis suggests financial ombudsperson automatically approves compensation payments for as few as five loans over a decade – a rule he claims is simply “ made up ” and is being “ militarized ” by corporations of complaint.
He’s also adamant that he welcomes regulation – but just wants the rules to be clear. âWhen you talk to the FCA, they’ll say there are no rules on how many loans a high-cost credit customer can take,â says Smith.
He gives the example of a family that takes out a home loan on Christmas five years in a row – just like their parents did.
The Department of Security referred Smith’s allegations to the ombudsman. A spokesperson denied using rigid criteria, saying: “We look at each case on its merits.” The spokesperson blamed âhistoric unaffordable lending practices, not our department’s decisionsâ for the collapse of the home loan market. A spokesperson for the FCA said it has “ acted to ensure that expected industry standards are met, ” adding: “ This includes the need for companies to only lend to customers who can afford to repay. ”
But Smith is convinced that damaging mistakes are being made.
He said: “ If I were the general manager [of the FCA] I would look for a date with my counterpart [at the Ombudsman] and I would talk about the real damage that is being done to the market. Someone has to break this cycle. ”
If they don’t, he says, the poorest will suffer.
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