Key points:
- Morses Club reports rising compensation claims numbers
- This is from the rule changes about doorstep lending
- As with Amigo Holdings, this could be a company-killer
Morses Club (LON: MCL) shares are down 23% this morning in London. The likely reason is Morses' update on the volume of claims being received by the household lending division. The worry with this is that the company as a whole could be eaten by the compensation lawyers – as has been happening to Amigo Holdings. We also need to recall that Wonga was entirely driven out of business by much the same moved goalposts problem.
We've talked about Amigo Holdings here. We looked at Morses Club here, and Morses shares here.
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The basic problem is that the rules have changed on high interest (or low credit rating, much the same thing) credit. The outcry about high APRs – entirely the wrong way to measure the costs of small sum and short term lending but that's the law for you – meant that new rules were brought in about how such loans should be made and managed. We can argue about whether it was managements which got the new rules wrong, or whether it was the rules themselves. But effectively large parts of the industry are alleged to have, as a result of the rule changes, become illegal.
The result of this has been the compensation lawyers saddling up to see what can be gouged out of the companies in this industry. Wonga, as we all know, went bust very early in this process. Amigo Holdings has been having significant problems and may or may not survive, that's now down to the courts more than anyone else.
Morses Club was in much the same industry and therefore faces much the same problem. With Morses there is a difference in that there's a thriving online lending business which operates just fine under the new rules. It's compensation for past loans made which is the potential problem. The difficulty with quantifying any compensation has led to the accounts being delayed – what worries is not whether it's a matter of being able to add them up but will the company still be a going concern at realistic estimates of compensation to be paid?
Today's announcement is about this: “Further to Morses Club's update in February 2022, the Group today reports that the home collected credit (“HCC”) division has seen a recent increase in complaints submitted by claims management companies. Claim volumes are now back at the levels previously reported in February,” The Feb announcement is the one that dropped the share price from c. 50 pence to 15 pence. That is, this is a level of claims which is significant.
The big question then becomes, well, is Morses Club going to be able to survive given such a level of compensation claims? Wonga didn't survive the rule changes, which gives us an idea of how bad things could get. Amigo Holdings is, as above, dependent upon the courts for continued life. Morses? Well, who knows, but that's what the trading decision is about. How bad are these compensation claims going to get and will there be a viable business left at the end of it?
