Provident's new FCA investigation points to the weakest link in affordability analysis

Yesterday's trading update from Provident, that led to a 28% fall in its stock price by the market close, was remarkable not so much for the plan to pursue a Scheme of Arrangement to deal with complaints for home credit and Satsuma online loans, but more for the news that the FCA has launched a new investigation into how Provident assessed the affordability of loans in the period between February 2020 and February 2021.

The Company stated that the appointment of investigators does not mean that the FCA has determined that rule breaches or any other contraventions have occurred. This language around 'appointment' seems to suggest that the FCA has served a Section 166 notice, requiring the firm to obtain a report by a 'skilled person'. It's a step that often results in recommendations from the reviewer rather than FCA enforcement actions. Many firms would never announce a Section 166 review, but as a quoted company Provident is presumably obliged to do so.

Regardless of the type of review, with what the non-prime lending sector now knows about the importance of affordability, most of which was already well-understood by February 2020, it does seem remarkable that something about Provident's recent approach to affordability analysis has led to this investigation.

It must surely be the case that Provident has been carefully assessing affordability for every loan. For home credit, Provident's website explains that the firm verifies income of applicants for credit (the industry's procedures for doing this are quite robust). The customer's expenditure is then reviewed by agents to facilitate a calculation of disposable income. These conversations, whether in person in the home, or for much of the investigation period over the telephone, would all have been recorded. So what could go wrong?

One possibility is agents not following procedures. It happens, but a large lender like Provident is bound to have checking procedures in place to pick up such problems - starting with monitoring call recordings, but very likely involving other forms of checks. Covid-related changes to policies and procedures, involving payment holidays, can disrupt even the best designed compliance systems. That wouldn't, however, explain the February 2020 start date for the period of review.

My money (to be clear, this is pure speculation) is on the problem being the apparently manual nature of Provident's customer expenditure analysis. Manual affordability analysis is only as good as the information provided by the customer. Credit users often know how affordability works. If the customer is desperate enough for the cash they may provide numbers that show sufficient disposable income. It's unfortunate, but also understandable at any time, and perhaps more than ever last year.

The lender may assume that a thorough approach to assessing affordability, which Provident appears to have had in place, will be recognised by the regulator as being sufficient. But the FCA is increasingly focused on outcomes. If many customers were unable to keep up payments on new loans, the FCA may question whether the lender carried out a 'proportionate' affordability analysis.

So my guess is that Provident's apparent reliance on customer information might be the 'weakest link' in affordability analysis that might have led to this investigation. The fact that the Financial Services Act 2012 requires the FCA to have regard to the general principle that consumers should take responsibility for their decisions appears not to get much attention anymore.

The alternative to relying on customer information is to use solutions based around open banking to establish expenditure, together with sound use of statistical data on typical family expenditure. This is not necessarily to replace what the customer says but to sense-check it and discuss any outlier results. Fintech lenders with no physical or telephone contact with their customers may actually be far better positioned to meet the FCA's affordability rules than a firm that regularly meets visits customers to review their situations.

My analysis of the UK non-prime lending markets is published by Apex Insight here:

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Asset Finance Policy Limited | Rickmansworth, United Kingdom

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