On 4 August the High Court of Justice sanctioned a scheme of arrangement under Part 26 of the Companies Act 2006 proposed by Provident SPV Ltd, a special purpose vehicle set-up for the purpose of assessing and paying compensation claims brought against Provident Personal Credit Ltd (PPC) and Greenwood Personal Credit Ltd(Greenwood) by aggrieved customers who had taken out consumer loans from those companies.
The scheme will cover customers who took out loans from those companies during the period 6 April 2007 - 17 December 2020. It will provide redress to those customers where the lenders did not always properly assess the sustainability, suitability or affordability of the loans they were offering to the customers. According to the evidence filed in court, the anticipated level of claims could exceed £1bn. The Provident group lenders assert that they do not have the financial resources to discharge liabilities of that magnitude. Therefore, under the scheme the Provident group proposes to make a limited "pot" of £50m available from which the scheme company can make payments to claimants. The scheme provides that such payments will be made in full and final satisfaction of claimants’ claims.
As a special purpose vehicle, the scheme company had no previous contractual relationship with the claimants. Nevertheless, the scheme uses the device - which has been used in previous schemes of arrangement – of creating a debtor: creditor relationship between the spv and the claimants by means of the spv executing a deed poll under which it voluntarily assumes a legal liability to the affected customers of the Provident group lenders. Having created that liability in this manner, under the scheme the spv then (i) compromises that liability by restricting claimants’ recourse for their claims to the £50m "pot" established under the scheme, and (ii) compels the claimants to release their original claims against the original Provident group lenders, thereby leaving those lenders free and clear of their historic exposure to those claimants.
In his judgment, Sir Anthony Mann found no significant issue with the scheme other than those which had been highlighted by the responsible regulator of consumer lending, the Financial Conduct Authority (FCA), in a "letter of concern" which the FCA addressed to Provident prior to the High Court hearing. In that letter, the FCA asserted that the compensation plan would offer consumers significantly less than they were owed and that the FCA believed that there was scope for the group to increase the level of funding for the scheme.
However, other than requesting in their letter that Provident should show their letter to the judge at the hearing for the sanction of the scheme, the FCA took no step to involve itself in the sanction hearing. It did not file any evidence, nor make any formal appearance in court through counsel at that hearing. The judge commented in exasperated terms on the regulator’s lack of engagement in the sanction hearing, highlighting that the FCA’s letter did not propose any alternative solution and that, on its own, it did not provide a sufficient ground for the court to refuse to sanction the scheme. The judge observed that that “while the FCA has raised a relevant point, it has not taken it further and produced material which would assist the court to go further.” The judge implied that, had the FCA submitted substantiating evidence to the court or attended the sanction hearing to argue and explain their case, the judge may have made a different decision.
The judge drew an adverse comparison between the FCA’s lack of participation in the sanction proceedings and its attendance at, and active participation in, the earlier "convening" court hearing. He observed that "the participation of the FCA at that stage of exercise was no doubt entirely proper, helpful and what would be expected of a body part of whose function it is to protect the interests of consumers". The judge also spoke in approving terms of the FCA’s active participation in the court hearing for the sanction of an earlier proposed scheme for ALL Scheme Ltd, another consumer lender for whom the FCA was the responsible regulator. In that case, the court refused to sanction the scheme, following submissions made in court by the FCA, objecting to the scheme.
This is not the first time the responsible regulators have been criticised by the courts for their lack of engagement in scheme of arrangement proceedings brought by regulated financial services businesses. In his October 2018 judgment on the application by Stronghold Insurance Company Ltd for permission to convene creditors meetings to vote on its proposed scheme of arrangement with policyholders, Mr Justice Hildyard was critical of the "hands-off" approach adopted by the responsible regulators (in that case, the Prudential Regulation Authority and the FCA) towards the scheme court process. The judge observed that “a more detailed explanation from the regulators as to what they would intend to do might well have altered my approach: as I made clear during the hearing, I consider it regrettable and surprising that, notwithstanding their concerns and responsibilities in relation to Solvency II, they should both offer no more than an entirely unelaborated confirmation of non-objection to the proposal …….It is not, of course, for me to dictate to the regulators how to discharge their difficult and onerous responsibilities, but ……..in any event if they have an alternative solution under consideration, both the company and this court could greatly have benefited from a more considered and elaborate report.”
So, where does this latest judgment leave the responsible regulator when a regulated financial services business proposes a statutory compromise proposal – whether through a scheme, a CVA or a restructuring plan – to its creditors? In fairness, the responsible regulator has a difficult balancing exercise to carry out. The regulator is always likely to be more interventionist where the compromise proposal will affect consumers or retail customers than where the affected creditors may be perceived to be "big and ugly enough" to look after themselves - for example, sophisticated commercial insurance policyholders or reassured who have the financial wherewithal to hire expensive lawyers to run the rule over the compromise proposal and challenge it in court. However, the lesson from the Provident judgment is probably that if the responsible regulator has sufficient misgivings about the compromise proposal to write a letter about it, they will probably have no option but to go the "whole hog" and appear in court by counsel to submit evidence to substantiate those misgivings.