Effects of Covid, FCA regulation and FOS actions bite as guarantor lender posts 80% fall in profits

A Financial Conduct Authority enforcement investigation, soaring complaints uphold rates and the economic impact of coronavirus have all contributed to an 80% fall in profits at a major guarantor lending firm. It illustrates that guarantor lending and other areas of the consumer credit sector can be a very precarious place to be right now.

The firm’s Q2 profits (for the period April to June 2020) of £3.9 million are 80% lower than the equivalent figure of £20.1 million in the previous quarter.

The firm’s complaints provision stands at £116.4 million. Previous announcements from the firm have indicated that its cost of complaints in the 12 months to 31 March 2020 was £126.8m, compared to just £100,000 in the period ending 31 March 2019; and that the FCA’s investigation of its creditworthiness and affordability assessments could lead to at least £35 million in compensation being paid to disadvantaged customers.

Financial Ombudsman Service data for the first quarter of its financial year (April to June 2020) shows that guarantor loan complaints soared from 415 in Q4 2019/20 to 1,1017 in Q1 2020/21. This figure was just 141 in the first quarter of 2019/20. The Q1 2020/21 uphold rate for guarantor loans at FOS was 85%, compared to 81% in the previous quarter.

While costs increased massively in some areas at the lender, revenue also reduced by 31.7% between Q1 and Q2. The firm’s second quarter revenue was £48.8 million, with the fall in turnover attributed to a decision to restrict lending to key workers for a period, and to the need to provide payment deferrals – as per Financial Conduct Authority instructions for assisting borrowers who have been financially affected by coronavirus. The firm says it has granted approximately 47,000 requests for payment holidays.

It all comes amid a backdrop of a boardroom battle, with the company’s founder trying to buy back control of the firm.