13 December 2022

Morses Club PLC

Issue of Practice Statement Letter and update on the Scheme of Arrangement

Morses Club PLC ("Morses Club" or the "Company" and, together with its subsidiary undertakings, the "Group"), an established provider of non-standard credit services, provides an update on the progress of the Scheme of Arrangement, the issue of a Practice Statement Letter ("PSL") and a proposal to finance the Scheme largely through an issue of equity.

A scheme of arrangement is an agreement between a company and its creditors (or a group of creditors).  A scheme of arrangement will bind the company and each of the creditors affected if:

(a)        it is approved by a majority in number (that is more than 50%), representing 75% or more in value, of the creditors who vote on the scheme of arrangement;

(b)        the Court approves the scheme of arrangement at a Court hearing. The Court will consider the scheme and only approve it if the legal requirements for doing so have been met; and

(c)        a copy of the Court order approving the scheme of arrangement is filed with the Registrar of Companies.

A scheme of arrangement would become effective on the date on which the last of these steps occurs.  When the scheme of arrangement is effective, the company and its relevant creditors are bound by it.

As the Scheme provides protection against historic liabilities, it is Morses Club's intention to continue trading once the Scheme is in operation and has engaged with key stakeholders regarding its go-forward business proposition accordingly.

Faced by the on-going material uncertainty arising from the current complaints situation, Morses Club considers that the Scheme is the best way to treat the Scheme Creditors fairly. In deciding to commence a Scheme process, Morses Club has also considered the alternatives to a Scheme. If the Scheme does not proceed, then the Directors continue to believe that the Company could no longer continue as a going concern and it will need to commence insolvency proceedings, which would lead to a materially worse outcome for customers and all other stakeholders.

Morses Club has incorporated a new wholly owned subsidiary, Morses Club Scheme Limited ("SchemeCo"), for the purpose of SchemeCo applying for a Scheme of Arrangement under Part 26 of the Companies Act 2006 ("Scheme").

As the next stage in the progression of the Scheme, SchemeCo is today issuing a PSL to relevant customers and the Financial Ombudsman Service ("FOS") pursuant to Practice Statement (Companies: Schemes of Arrangement under Part 26 and Part 26A of the Companies Act 2006 dated 26 June 2020). A copy of the PSL will also be available at www.morsesclubscheme.com. The Court convening hearing  for the Scheme is listed for 7 March 2023 and further information is provided in the PSL. The convening hearing is to provide legal sanction for the Scheme, and to define the Scheme Creditors (as defined below). SchemeCo will seek to contact all known Scheme Creditors  to inform them of the Scheme and provide them with a copy of the PSL. There will also be advertisements in certain national newspapers and social media. Morses Club wants to ensure that all eligible customers are able to vote on the Scheme and participate in it as far as possible.  

As detailed in the PSL, SchemeCo is the only applicant for the Scheme. In summary, (the details are available in the PSL), the creditors under the Scheme are, subject to limited exclusions:

1.     All current and former customers with any potential redress claims in relation to historic loans made by Morses Club (or which it is otherwise responsible for) which were made between 1 April 2014 and 2 August 2022. These redress claims are in respect of affordability, sustainability and suitability, so that the Scheme will provide certainty to the total liability arising from these customer complaints; and

2.     Certain related liabilities owed to the FOS.

Together, the eligible customers and the FOS are the "Scheme Creditors". All other creditors of Morses Club are not party to the Scheme and their rights are unaffected by it, so there is no action for any such persons to take.

Compensation fund and proposed share issue

A compensation fund of at least £20m is proposed to fund the Scheme comprising two elements:

1.     £15m, or if greater, the fair value of Morses Club, (based on an independent market valuation which will be provided before the end of FY23), is to be contributed into the compensation fund by the Company. The Company proposes to finance this by the issue of equity, in June 2024, on the basis of at least 19 New Ordinary Shares for each existing Ordinary Share which will result in existing shareholders being diluted by at least 95%.  This issue will be conditional on shareholder approval at a General Meeting which is expected to be held by the end of February 2023.  While the funding itself will not occur until the end of the Scheme process in June 2024, the Company is seeking investors who will agree to guarantee the funding before the Court convening hearing which is listed for 7 March 2023. In the event that such an arrangement is not made, or shareholders do not approve the fund raise the Scheme will not proceed, and the Company will need to commence insolvency proceedings.

The Scheme will also need the approval of the requisite majority of Scheme Creditors and, thereafter, the Court in order to become effective.

2.     £5m, or if greater, the realisable value of Morses Club assets less certain costs and operating provisions, is to be contributed into the compensation fund by Morses Club by 29 March 2024. If there is insufficient money to pay the Morses Club funding into the compensation fund by this date, then Morses Club will not pay any money into the fund, and the equity funding will not complete with the consequence that the Scheme would terminate immediately and Morses Club would enter into insolvency proceedings. 

The Directors are of the opinion that it is in the best interests of the Company, its subsidiaries and all stakeholders to proceed with the commencement of the Scheme as quickly as possible.

The Company announced on 11 August that it was pausing the processing of all new unaffordable lending claims with effect from that date, and the pause remains in place. However, the FOS has to date not agreed to pause complaint processing and is handling complaints referred to the service.

Morses Club has continued discussions with the Financial Conduct Authority ("FCA") and the FOS, to keep them informed of the Scheme as it has progressed. In connection with the Scheme, the FCA required the appointment of a skilled person under section 166 of the Financial Services and Markets Act 2000. The Company subsequently appointed Avyse Limited to conduct the skilled person review of the redress methodology, and a report has been submitted to the FCA accordingly.

The PSL contains the following statement from the FCA:

'Morses Club Scheme Limited has issued this PSL without the support of the FCA. The FCA has not yet been given opportunity to complete its assessment of the Scheme, in particular its underlying methodology for assessing claims.

The FCA has only recently received all the information from Morses Club PLC to the standard required. The FCA needs to assess the information before being in a position to know whether it intends to formally object to the Scheme.

The underlying methodology for determining claims is a critical component of the Scheme. As the FCA has not completed its review of the methodology, the FCA is concerned that the expected outcomes may not be credible, and that the proposed scheme may not be the best deal that Morses Club PLC can offer to redress customers.

The FCA has informed Morses Club PLC that it reserves the right to take such action as it may consider appropriate once the terms of the Scheme and its methodology have been finalised and the FCA has completed its review.

Morses Club PLC has provided an undertaking that it will reissue the PSL if the FCA advises it is necessary to do so at any time prior to the convening hearing. The FCA reserves its right to object to the Scheme at any stage.'

Morses Club is continuing to work closely with the FCA and will update the market should it be necessary to reissue the PSL.

Gary Marshall, CEO of Morses Club, said:

"We continue to work on finalising the detail of a Scheme, and the issuing of a PSL to Scheme Creditors is a significant step in progressing the Scheme and removing the uncertainty of the Company's ongoing redress claims liability. Without the certainty provided by a Scheme, there continues to be material uncertainty that the Company could continue as a going concern. Despite the challenges which the business faces, we will work with all our key stakeholders to ensure the best outcome for our customers, and the survival of the Company".

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014. The person responsible for this announcement is Graeme Campbell, Chief Financial Officer.

For further information please contact:

Notes to Editors

About Morses Club

Morses Club is an established provider of non-standard financial services in the UK. The Group consists of Morses Club, the UK's largest home collected credit ("HCC") provider¹, and Shelby Finance Limited, Morses Club's Digital division, which operates under the online brand Dot Dot Loans, an online lending provider. The Group's growing Digital capabilities and scalable, highly invested IT platform has enabled Morses Club to deliver a broad range of lending products and services to the non-standard credit market.

UK HCC is considered to be a specialised segment of the broader UK non-standard credit market. UK HCC loans are typically small, unsecured cash loans delivered directly to customers' homes.

Morses Club's HCC division is the largest UK Home Collected Credit (HCC) lender¹ with 116,000 customers throughout the UK. The HCC division enjoys consistently high customer satisfaction scores of 95%². In 2019 the Company introduced an online customer portal for its HCC customers, which now has over 95,000 registered customers which is 82% of HCC customers.

The Group's Digital division, Shelby Finance, operates under the online brand Dot Dot Loans providing online instalment loans of up to 48 months to c. 25,000 active customers.

Morses Club listed on AIM in May 2016.

About the UK non-standard credit market

The UK non-standard credit market, of which UK HCC is a subset, consists of both secured and unsecured lending and is estimated to comprise around 10 million consumers³ and total loan receivables of £9.6bn⁴.

Non-standard credit is the provision of secured and unsecured credit to consumers other than through mainstream lenders. Lenders providing non-standard credit principally lend on an unsecured basis and the market is characterised by high frequency borrowing. Approximately 2 million people move annually between standard and non-standard markets ⁴.

Since February 2014, unsecured personal lending has grown from £161 billion to £225 billion in February 2020. It has since contracted to £197 billion in August 2021⁵.

^{1 Based on Net Loan Book of £45.3m as at 28 August 2021
2 Independent Customer Satisfaction Survey conducted by Mustard
3 FCA High Cost Credit Review Technical Annex 1: CRA data analysis of UK personal debt - July 2017
4 Apex Insight - Non-Prime Consumer Credit: UK Market Insight Report - December 2020
5 Table A5.2, Bank of England Money and Credit Bank stats August 2021}