Key points:
- Morses Club interims show business shrinking
- This leaves open the ultimate question
- Can it pay the compensation and still survive?
Morses Club (LON: MCL) has announced its interims and the company is shrinking – to add to the problems over compensation claims for past lending. The big question therefore becomes is Morses likely to follow Amigo Holdings into really serious problems, or even Wonga into non-existence? The grand problem here being that the rules changed on MCL midstream. This is as a result of new rules about who can lend what under what terms – which then, given the miracle of the modern legal system, cast their shadow back through time.
The basic issue here is that short term and low amount credit is expensive to provide. That means that when measured by APR the interest rate looks sky high – meaning that innumerates think it's unfair. So, the rules were changed. That means that future credit offerings have to be constrained by these new rules. But at the same time the legal system is making compensation claims for borrowers who gained credit under the old system. This is the basic problem faced by all of the high risk credit providers.
Morses Club among them. The company is being overwhelmed by those claims of compensation for past loans. They've tried to stop the rot by limiting claims, turning to a scheme of arrangement and so on. This may or may not work. But Morses has something that others in this sector might not have – a business which seems to meet the new rules and still work. The big question is whether those past claims can be met – however that's done – while still leaving that newer business in operation.
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The interims today show that this ability to break free of past liabilities is still very much up in the air:”the Company's trading performance has continued to be impacted by the level of claims in the HCC division made prior to 11 August”. It's not just that there are those past claims – they're having an effect on current business as well. “This has led to a reduction in lending volumes” Having to put money aside for those claims means there's less to be lent out – which clearly shrinks the business. “The credit issued in the period was £10.2m, which is 64% below the same period in the prior year” and in the other division “34% below the same period in the prior year”.
The logic here is that the only way those past customers are going to gain their compensation is if there's an ongoing business to pay them. But provisioning for those past compensation claims is restricting the ability of the ongoing business to survive. So, the big question becomes, can they park those past compensation claims off somewhere to allow the ongoing business to pay them off? The courts will decide upon this in the fullness of time.
This is what the basic Morses Club bet is – can they pay off the past claims and survive as a business or will they get eaten by the lawyers?
