Morses Club (LON: MCL) shares are up 12% this morning on the back of their trading update. The results shown there are perfectly fine, good even. The lending business is growing, one sector that wasn’t working out has been folded, the prediction is for profits even if down on the market consensus of a few weeks ago. Why shouldn’t the shares rise on this?
The answer being that Morses Club faces an extremely hostile environment precisely because it is a doorstep (for which read, low credit, high interest rate and small sum) lender. We saw this when Morses Club made an announcement a couple of weeks back and the shares dropped 63% in one hit. That was a bit of a disaster in fact. There’s going to be more to come from that too as the CEO dumped his shares and left the company just days before that information release. There might well be more than just an FCA inquiry into that episode, not that that affects the company directly.
What does affect Morses Club directly is the same problem that has been dogging Amigo Holdings recently. The very thing which put Wonga out of business. That is, the horrendously vile legal environment faced by these high-cost credit lenders.
It’s possible to make the argument that high-cost credit simply shouldn’t exist. It’s possible to make the opposite one that if people desire it then why shouldn’t they be allowed to have it? As the Federal Reserve Bank of New York does here. The actual situation in the UK is that such lending is still legal. There are rules about how and where it can be done though.
Those rules are also becoming tighter over time and there’s a certain retroactive application of some of them. In the sense that the no win no fee lawyers are pursuing the companies – Morses Club among them – for contracts that were presumed to be legal when they were issued but which are now seen to be, or believed to be, not so legal. Or at least so one-sided that those who entered them are now to be due compensation.
This poses a significant problem of course. It might well be that all current and future contracts hew precisely to what is allowed and there could be – as Morses Club seems to be indicating – a perfectly decent lending business in exactly that. But how much of the company are the lawyers going to eat in compensation claims for those past activities?
That’s the great unknowable and is – as has largely been true at Amigo Holdings – the risk being faced by Morses Club. Not the current business at all, but the effects of those historic contracts. There’s thus high risk associated with what does indeed look like a perfectly reasonable current business. Morses Club says that claims are running as they suggested a few weeks back – but how long is that going to remain true?
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Tim Worstall is a freelance writer specialising in economics and the financial markets.