Embattled consumer lending firm Provident Financial faces a bill that could be as high as £300m for mis-selling a product to customers of its Vanquis credit card business, according to analysts.
The stock is a significant holding across Neil Woodford’s retail and institutional funds, which in total own about 15 per cent of Provident Financial shares.
The Vanquis business is currently being investigated by the Financial Conduct Authority (FCA) over the sale of a product called a repayment option plan (ROP).
ROP was added onto Vanquis accounts and froze debt owed if certain “life events” happened.
A note from analysts at Royal Bank of Canada put the potential bill faced by Provident at £300m.
Provident Financial shares have fallen from £29.10 to £8.00 over the past year, and are down 3 per cent today following the publication of RBC's note yesterday.
The bulk of the fall happened on 22 August when the company issued a profit warning and scrapped plans to pay investors a dividend.
Mr Woodford defended his holding in Provident Financial, saying the long-term prospects for the company remain attractive.
Scott McKenzie, who used to run the £21m Martin Currie UK Equity Income fund and now runs the £3m TB Saracen UK Income Fund, said the travails of Provident Financial are “about as bad as it can get for an income investor".
"The shares were yielding 6 per cent, that is gone, so your income from the shares is gone, and the share price has fallen a lot so the capital loss is significant as well.”
Mr McKenzie said the very large funds in the UK Equity Income sector have little choice but to buy shares such as Provident Financial, as only the biggest companies in the FTSE 100 allow fund managers with billions to deploy to take significant stakes in companies.
But Mr McKenzie said the problem occurs when the share prices of those giant companies fall sharply, the large equity funds are forced to hold onto the stock, as they wouldn’t be able to sell out of the shares in a falling market.