(Sharecast News) - Subprime lender Morses Club said on Wednesday that it was considering using a scheme of arrangement to deal with the rising number of customer redress claims for unaffordable lending.
"A key objective of a potential scheme would be to treat all customers equitably and settle eligible redress claims over a period to be defined," it said. "The directors believe that a successful scheme would provide more certainty in respect of the total liability for redress claims and help to secure the longer-term stability of the company."
Although it believes it has adequate liquidity for the immediate future, Morses said that without a potential scheme, the level of redress claims could jeopardise its future. The company will continue to explore alternative options but said it's likely the alternatives would result in those with redress claims receiving considerably less than they would under the scheme.
As a result of the complaints and in advance of a potential scheme, an additional provision of around £45m is expected to be recognised in the FY22 accounts as an exceptional item.
"The impact of the uphold rates on complaints and adviser fees resulting from additional audit work, means that the adverse effect on adjusted profit before tax for FY22 is now likely to fall within the range of a 30% - 40% discount to market consensus," Morses said.
The company highlighted a decline in sales volumes after it tightened its lending policies. In addition, the structure of the loan book has changed due to a higher concentration of new customers. As a result, for the year to 25 February 2023, which is a transition year in which legacy issues can be largely resolved, it will not make a profit.
Accordingly, the board will not recommend a FY22 final dividend to shareholders to protect its cash position.
Chief executive Gary Marshall said: "A successful scheme of arrangement would provide more certainty to the total liability arising from customer complaints and ensure that we can reshape the business for the future.
"The potential scheme is intended to provide a fair settlement for all eligible customers, whilst securing the company's future and enabling us to continue to provide access to credit for an underserved and growing demographic."
At 0810 BST, the shares were down 33% at 5.65p.
