The instability at Provident Financial risks driving many into the arms of loan sharks.
I first came across the now-troubled Provident Financial, or ‘the Provvie’ as it is universally known, when I was researching credit unions in the Rhondda Valley. The two sides of finance are bitter enemies, and compete for making loans to people on low incomes.
Credit unions are ferociously loyal to their members and bitterly resent the vast interest rates charged by doorstep lenders like Provident. But for too many of the country’s most vulnerable borrowers, those who need short-term loans to get by, the man from the Provvie is almost a friend. Who else will ‘help’ them when they need a new mattress or can’t afford to buy food? The withdrawal of grants for basic items as part of the social security safety net in the 1980s was a gift to such lenders.
As we learned prior to the last financial crisis, there is much money to be made out of the poor; their vulnerability and lack of alternatives mean they are pushed into accepting the highest rates of interest. The ability of banks and mortgage companies to sell these debts on rapidly through the process known as securitisation made them more attractive still.
The Provvie’s traditional business model was different. Its agents were embedded in their communities. They had a good nose for who would pay back and were allowed to set their interest rates according to their assessment of risk.
What has caused, possibly, terminal damage to the Provident, it appears, is the fact that it began to ask a computer to say yes or no to borrowers, rather than a human being. It is symbolic of the weakening of our retail financial sector, as sophisticated algorithms take the place of the bank manager, who has the knowledge of the situation on the ground and the ability to make judgements about risk. As banks shift their attention to the casino, small businesses and small borrowers are left at the mercy of technocratic, anti-social decision-making – weakening and destabilising our credit system.
It has long been clear that the benefits of financial alchemy do not accrue to the poor. The debts of the poor have generated sufficient equity for Provident to have been (prior to yesterday’s disastrous falls) a FTSE 100 company. Its stock held by a mixture of large investors owning for profit and hedge funds who were holding the stock for speculative reasons.
From talking to people on the doorsteps of the Valleys, I am now sitting in a committee responsible for the financial stability of European banking and monetary policy. The response of the regulatory authorities to the financial crisis was extraordinarily technical and focused on capital reserves. It ignored the human aspect of hope, aspiration and denial that lies behind gambling on debt whether you are a young man in Blackwood who wants a flash car or a hedge fund manager who wants a more expensive flash car.
From there I have watched as the stricter controls introduced in the years following 2008 have been gradually watered down and rolled back. Most recently I’ve sat through negotiations over the new securitisation legislation and seen fellow MEPs clearly responding to the pressure of the banking and finance lobbies, who want to maximise their profits by bundling up and selling on their loans with minimum restriction.
With the retention rate (the level of ‘skin in the game’ or continued exposure to risk from the original loans) reduced to a mere 5%, it was clear, at least to some of us, that we were recreating the conditions for a crisis – and we will duly vote against the law in September. Although the Bank of England has expressed concern about a possible bubble, politicians from all countries are rushing to open up a channel of contamination.
So far, most of the chat about Provident Financial has been on the business pages. But with massive levels of public debt in the UK, added to the instability caused by Brexit, could the precipitate fall in their share value be a straw in the wind, the first sign of an impending credit crisis? I will be raising questions about this with the European financial regulators.
Back on the doorsteps of housing estates across the UK, it is the poor that look set to suffer the most – as they did in the financial crisis of 2008. It has always been a scandal that the poor have paid the most for credit, with the profits been siphoned up to the richest. If the Provident is to collapse, it will leave many in vulnerable communities looking for another source of emergency credit. Inevitably, some will be driven to search out even more toxic lenders.
Fortunately, many will also have access to a credit union in the community that can fill this gap – with a fairer and more empowered form of credit. We can only hope that if it doesn’t precipitate another financial crisis, perhaps the collapse of The Provident will hail the rise of the credit union and fairer, more sustainable lending.
Molly Scott Cato is Green MEP for the South West of England and Gibraltar
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