Short-term lending to consumers at high rates of interest was once all the rage, but it has since become the target of a deluge of customer complaints. In paving the way for two hard-pressed lenders to exit the controversial market, the High Court addressed the grave financial consequences of the debacle.
The lenders had received tens of thousands of claims for redress from dissatisfied borrowers. They had so far paid out more than £80 million to settle claims, funded by their parent company. The lenders estimated that their eventual liabilities could well exceed £1 billion and, on the worst possible scenario, they could reach £3 billion. They said that they were not in a financial position to pay such sums.
In those circumstances, the Court was asked to approve a scheme of arrangement whereby the lenders’ liabilities to borrowers and in respect of Financial Ombudsman Service fees would be assumed by a new company that would be established as a special purpose vehicle (SPV). The parent company had agreed to plough £50 million into the SPV to form a pool to meet such liabilities and would also pay the estimated £20 million cost of running the scheme.
Ruling on the matter, the Court noted that under the scheme, borrowers who did not lodge their claims within six months would have their claims barred. It was estimated that they would recover no more than 6 per cent of their claims. Given that claims typically fell within the band of £500 to £1,000, the sums recovered by individuals were therefore likely to be small.
On the other hand, it was argued that the scheme would benefit borrowers in that the lenders would otherwise be forced into insolvency. The Court accepted that, if that happened, borrowers would receive nothing. From their point of view, the limited fruits of the scheme were said to be better than nothing. After the scheme became operational, the lenders would quit the market and be wound down.
The Court noted that the Financial Conduct Authority did not support the scheme and had expressed a number of what it viewed as serious concerns regarding its terms. In the event, however, it had decided not to appear in court to oppose the scheme as a matter of company law.
Approving the scheme, the Court accepted that it represented a fair and rational outcome. There was nothing to gainsay evidence that, due to its own financial position and the need to maintain solvency ratios, the parent company could not sensibly pay more than £50 million into the SPV. Any funds remaining following the winding down of the lenders would also be remitted to the SPV.