Vanquis Banking Group plc (VANQ) Earnings Call Transcript & Summary

Hello, and welcome to the PFG Interim Results Announcement. My name is Rosie, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand you over to Malcolm Le May to begin today's conference. Thank you.

Thanks, Rosie, and good morning, everyone, and thanks for joining us for the presentation of our 2021 interims. The plan is that I'll take you through some of the highlights of our achievements and how we've performed in the first half, including the key strategic initiatives before Neeraj will take you through the financial review. I'll then return to the strategy outlook, including having now that we've sorted out our CCD business, how the group is accelerating its transition towards becoming the leading specialist bank serving underserved customers in the mid-cost credit card, vehicle finance and unsecured personal loan markets. And then at the end, we'll return to questions. So turning to Slide 4. Even though we started the year in lockdown, I think operationally, the first 6 months of this year have not been as difficult as 2020 were. The economic picture, I think, has improved with the easing of lockdown restrictions and customer confidence has begun to return. And I think this has been clearly reflected in our results. The group has reported an adjusted profit before tax of GBP 63.5 million for the first half. That's excluding CCD. And Vanquis and Moneybarn remain profitable throughout even when including and excluding provision releases. The group's overall adjusted profit before tax, including the losses in CCD, was GBP 5.8 million. And that's significantly up on the first half of 2020 when we reported a loss of GBP 32.7 million. The group's continued its policy of maintaining robust capital and liquidity positions, which we've done throughout the pandemic, and we had a closing CET1 ratio of 32.5%. And that represents roughly a GBP 225 million of capital headroom over our total capital ratio and combined buckets of 26%. Our balance sheet has allowed us to lend throughout to customers in our ongoing businesses, and that's continued through the pandemic. And it's meant that the group was well positioned in the first half as consumer confidence returned and demand for credit increased quarter-on-quarter. And the group has also delivered transformational change in the period with the managed wind-down of CCD. And now it's sanctioned scheme of arrangement for providing customer redress. These 2 initiatives will end in 2022, but in effect, their impact has already been felt and accounted for and their successful delivery will accelerate the group's transition towards becoming the leading specialist in the -- to the underserved customer in the mid-cost sector. If we turn to Slide 5. The Consumer Credit Division had a very busy first half, so I've decided to come to this, first of all. As you know, in our results in May, we regretfully announced that the managed runoff and eventual closure of CCD was necessary. In March, we had already announced our intention to launch a scheme of arrangement with the GBP 50 million set aside proposed for customer redress and obviously, the GBP 20 million of associated costs. And successfully delivering on these 2 key projects has been a big priority for the group in the first half. The wind down of CCD is tracking in line with our expectations with net remaining receivables at June being only GBP 42 million. But we still expect the losses of up to GBP 100 million to close the business down, as we previously announced. As you know, the scheme of arrangement was also successfully sanctioned by the court following its hearing on the 30th of July. So customers now have access to the 50 million redress. Delivering on these 2 projects and the ultimate closure of CCD in 2022 has fundamentally changed the shape of our group and meant our transition has begun, and we are now becoming the specialist bank of the underserved customer in the mid-cost sector. And of course, that is an area we want to focus on going forward and are accelerating towards. Finally, in March, as you know, we announced our scheme of arrangement for CCD. The FCA -- when we did do that, the FCA informed us and we indeed informed the market that CCD was subject to an enforcement investigation. By then focusing on some of its affordability and sustainability lending practices for the short period between February 2020 and February 2021. I mean during the first half of the year, we continue to work closely with the FCA to help them with their investigation. And as I've mentioned, the group has now taken a provision of GBP 5 million to cover the first half -- to cover the first -- in the first half to cover expected costs and balances related to any potential outcome of that investigation, which is not expected to conclude until 2022 at the earliest. Moving on to Slide 6. This outlines our ongoing product based view of the group. I think this gives a useful snapshot of these markets, where we sit within them and the opportunity we believe they present. We expect the markets to grow in part driven by the consequences of the pandemic and that increases our opportunity for growth. [indiscernible] key take away from me. [indiscernible] our cost real Vehicle Finance business are market-leading positions in large growing segments. And our ambition to grow our presence in the unsecured personal-loan space will benefit from our significant expertise across underwriting, collections and financing in the mid-cost space. We continue with this theme, as you can see on Slide 7. Our exit from a high-cost short-term credit market through the closure of CCD not only deepens our overall addressable customer base but also increases its market opportunity as we move away from high-cost credit to mid-cost and fewer personal loans. In effect, we are exiting a GBP 600 million market in a space with a lot of regulatory change, the high-cost short-term credit space, and replacing it through unsecured personal loans in the mid-cost space, which is a market we estimate to be approximately GBP 3 billion. This change means that we have a deeper pool of potential customers and there's a step change in our addressable market opportunity towards GBP 16 billion. And PFG's proposition is now fully mid-cost in its focus. Obviously, there's a high degree of correlation between this cohort of customers and those [indiscernible] also improves. So now all of our customers are basically full-time salaried employees. They have earnings that are in line with the national average and have credit scores typically above 500. It is a customer base which typically seeks to improve its credit score and we are working to ensure we're in generous sense of customer loyalty as we improve our product and service offering over time. To conclude, in effect, we now have a unique opportunity here to help our customers grow the group. And as we are -- as I said earlier, the only specialized bank focusing on this market. Turning to Slide 8. The next few slides focused on how we -- how our ongoing businesses and products have performed in the first half. And as the country exited lockdown, restrictions were partially lifted and consumer confidence has grown as the economy has opened up. Our credit card business, Vanquis, reported an adjusted profit before tax of GBP 57.1 million for the first half, significantly higher year-on-year and maintained appropriate capital and liquidity positions throughout the period. Customer bookings for the period were almost at GBP 100,000. That's down on the first half as we continue with a quarter's approach to risk. And we'll take a cautiously optimistic approach until we clear -- have a clear sight on where unemployment levels are likely to aligned. Customer credit card receivables reduced to just under GBP 1 billion for the period, impacted by lower customer acquisition and, of course, reduced customer spend, primarily when the country was in lockdown at the start of this year. In terms of trends we've seen during the first half, credit card delinquency has remained favorable and customer spending patterns have begun to improve as lockdown restrictions have eased. By the end of June, expenditure levels were up 17% year-on-year and were in line with levels seen in June 2019 on a per customer basis. And I think Neeraj will go into greater detail on this in his section. As lockdown restrictions come to an end in August and consumer confidence continues to grow, I see the credit card business has been well positioned to build -- to continue building on its good momentum [indiscernible] achieved during the first half. Slide 9 shows our unsecured personal loan business. Here, our plan is to build on our existing expertise within the Personal Loan segment and expand our offering. And we've plan to cater to a wider range of customers' credit scores. Our starting point is a small business for just under GBP 16 million of receivables, operating in a market which we estimate to be of the order of GBP 2.9 billion as at the end of 2020. Part 1 of our plan is to take our unsecured loan offering to the open market. To date, our loan offering has only been available to existing Vanquis customers. We plan to do this during the fourth quarter of 2021, offering customers loans of between GBP 1,000 to GBP 5,000 over 12 to 20 -- sorry, 12 to 36-month period with APRs from 25% to 60%. Part 2 of the plan is to launch our next loan product set with loans between 2,000 [indiscernible] in the fourth quarter of this year -- late in the fourth quarter this year. Once launched, our new open [indiscernible] will allow us to cater for the [indiscernible] product position, but obviously build customer receivable growth over time in a largely untapped market for us at the moment. Slide 10 shows our vehicle finance business, Moneybarn, and this reported an adjusted profit before tax of GBP 15.8 million in the first half of 2021. That's up strongly on last year and was driven by receivables growth and obviously lower impairment. It delivered strong receivables and customer number growth for the period, as demand for vehicles improved progressively as lockdown restrictions were eased. Credit issued was up 30% and GBP 150 million for the period and customer bookings were about -- were up 20%. That's about 20,000 customers. Total receivables for the year -- sorry, the half year finished at GBP 602 million, which was up around 17% for the period with key workers continuing to be significant drivers of the new loans representing around 34% of loans issued. I think our stewardship of Moneybarn since we acquired it in 2014 has been pretty good. It's shown its greatest receivables book from around GBP 130 million to over GBP 602 million. And given the size of the market and our nearly 10% share of it, I continue to see an attractive multiyear opportunity for us here. Slide 11, I think, talks to the influence of regulation and the importance of regulatory relations. And this is a topic you've obviously heard me discuss before. Not surprisingly, I want to keep PFG at the forefront of regulation as much as possible. I and the regulators have spent more time together in the last 6 months, I think, than ever before. We know each other better, and we've worked constructively to deliver the scheme, which we believe to be in the best interest of all of our customers. That said, the FCA is not our only regulator. It's equally important to maintain and build good relationships with the PRA, and we've now started the process of preparing our application to the PRA to allow us to use our retail deposits from the bank to fund different parts of the group. Looking forward, in terms of regulation, obviously, the roll out review, which was published in 2021 still indicates the direction of [indiscernible] is in unsecured lending. It will impact all providers as will the FCA's new consumer duty of care, which is another significant regulatory development in my mind. The duty of care consultation will focus on customer outcomes, allowing them to act to make decisions for their benefit. It extends to both retail and SME clients and will require firms to consider what consumers might expect [indiscernible] product. [indiscernible] rather than hinder them to achieve the FCA on delivering these key bank initiatives. But I do feel the changes been made and the direction of travel we set out for the group shine with the FCA's thinking. Moving to Slide 12. In summary, the group has delivered, I think, for its customers. It's performed resiliently in the first half of the year, and I think it's well capitalized. Our credit card and vehicle finance businesses are well positioned for the second half and both delivered a higher profit before tax. That said, we still think it's right to be cautious as the macroeconomic environment remains uncertain and will remain so until the economic impact following ending is clear. Most likely, we'll see that by the end of the year. Returning to the group. As I said, it's executed on 2 of its 3 strategic projects for the year with the sanctioning of CCD scheme of arrangement and its managed wind-down. It's also on track for the expansion of its unsecured loan proposition in the fourth quarter, as I've said. Delivering on these key projects has definitely accelerated our transition into a leading specialist bank, focusing on unserved customers in the mid-cost sector with its 3, 4 products of credit cards, vehicle finance and soon to arrive unsecured loans. I will now hand over to Neeraj and he will run [indiscernible] numbers, and I'll then wrap up with strategy and outlook before we have some question and answers at the end. Neeraj, over to you.

Thank you, Malcolm. Good morning, everyone. Slide 14 shows us that the group adjusted profit before tax, as Malcolm mentioned earlier, for the first half of 2021 was GBP 63.5 million compared with a profit in H1 2020 of GBP 4.9 million. The group adjusted profit before tax and impairment for H1 2021 was GBP 114.5 million compared with GBP 190.9 million in H1 2020, demonstrating the impact of continued reduced receivables, which are now turning the corner back to good growth. It's important to point out that Moneybarn and Vanquis have remained profitable, both pre and post impairments during H1 2021. H1 2021 has been as challenging, if not more so, for everyone especially our customers, but has also started to show signs of recovery as we come out of lockdown. Our receivables have continued to be negatively impacted due to a reduction in spending by Vanquis customers, which is unsurprising. However, this trend is reversing. The procyclical IFRS 9 provisioning in 2020, driven mainly by the worsening unemployment forecasts in 2020, show sign of reversing on the same basis as unemployment statistics become more favorable. This improving trend experienced during H1 2021 continuing through the rest of the year is dependent on the pandemic not resurging with a stronger virus resistant strain and the impact post-furlough end in September, as Mark mentioned. I'll go through impairments in more detail shortly, but we remain cautiously optimistic. Financially and strategically, the group continues to position itself to deliver the ambitions it set out at the Capital Markets Day in November 2019, having lost 2020 to COVID. Appropriate capital and liquidity resources have been maintained during H1 2021 and will be central to the delivery of the group strategy for the benefit of all spaces after taking into account the financial impact of the CCD scheme of arrangement and its controlled one day. With this in mind, we have successfully refinanced and upsized the group's RCF and Moneybarn securitization facility in such a manner that the net funding has increased by GBP 120 million and there is now no refinancing of any group debt during 2022. This demonstrates the strong debt capital market support the group has fostered. In addition to this, I'm also pleased to report that last week, Vanquis Bank's AAA-rated notes based on our credit card receivables were accepted by the Bank of England as eligible collateral for their funding schemes, including the TFSME scheme. This also shows that the Bank of England view the credit risk of the group as acceptable to it in the context of its funding schemes. The group continues to focus on improving its return on equity, both in its amount and its sustainability. Turning to Slide 15. The group results demonstrate the strengthening profitability of both our credit cards business and motor finance business. The managed wind-down of CCD continues to plan with the scheme funding already accrued for in 2020. The CCD net loan book is now less than GBP 40 million. The statutory loss for the period of GBP 44.2 million includes exceptional items of GBP 46.3 million, which are predominantly redundancy costs for CCD colleagues. Group receivables have reduced since December 2020, but have passed their idea. Retail deposits have been normalized in line with our previous statements to an appropriate level following the circa GBP 1 billion increase during 2020, which positioned Vanquis Bank strongly during a period of extreme uncertainty. On Slide 16, you'll see the group results are set out by division. As you can see, impairments taken in 2020 have meant that the charge in H1 2021 has been less prominent. The coverage ratios for Vanquis and Moneybarn remain strong as we into H2 of this year. Moneybarn has done well to continue to grow its receivables during H1, whilst maintaining its focus on improving credit quality. Turning to Slide 17. The KPIs are set out on this slide, adjusted for ongoing operations. The cost income ratio has been significantly affected by the reduction in income due to a reduction in receivables. The return measures are much improved, but also reflect the journey to lower credit risk as evidenced by the risk-adjusted NIM improvement that you can see at the bottom left-hand side of the table. The capital ratios have benefited from a significant reduction in receivables. On Slide 18, the graphs of return and EPS showed the significant underlying improvement that is emerging from H1 '21. You can see here that H1 '20 was heavily impacted by increased impairment provisions. The underlying picture on returns is that H1 '21 return on required equity approaching 20% is the leading indicator on return on tangible equity once the current excess capital is deployed over the next 3 years. Slide 19 shows that the credit card spend, dramatic impact of lockdowns, but also shows that our customers have returned to pre-COVID levels of spending more quickly than the market as a whole. The latest view on spend week-on-week shows the differential is now negligible. Holiday spend, as you would expect, remains below pre-COVID levels. Slide 20. The customer bookings are starting to show signs of strengthening in the credit card business with continued improving demand for used cars within our motor finance customer cohort. On Slide 21, it's encouraging to see that new credit being issued in both our credit card and motor finance businesses has returned to at least pre-COVID levels. New credit issue is also at higher credit quality than pre-COVID levels. Slide 22 shows us collections performance remaining strong, especially in the motor finance business. Credit cards remain broadly similar to pre-COVID levels, albeit on a smaller receivables book. Payment holidays are now negligible. Turning to impairments. On Slide 23, impairment has been falling in H1 '21 in our credit card business, both due to the improving macroeconomic outlook as well as the reduced delinquency being experienced on an overall smaller book of loans. A similar impact is being realized in the motor business on an increasing book of car loans. The coverage ratio on Slide 24 is both on credit card and motor finances remain significantly above the pre-COVID as we navigate through the removal of furlough and the realization of the improvements in the macroeconomic outlet. These are based on the IFRS 9 provisioning applied to the nature of our customers and the type of debt they have with us. That is to say that, that is nonresidential mortgages. On Slide 25, and as I mentioned earlier, delinquency rates are reducing in our ongoing businesses. This is a function of improved credit acceptance quality and, to some degree, the effect of furlough payments to our customers. We will be looking at the impact of furlough rolling off very carefully in Q4. But as I said in the previous slide, we remain at strong levels of coverage until we have seen the impact of the improving economy and removal of furlough coming through. Turning to the ECL, expected credit losses, on Slide 26. The H1 expected credit losses remain robust and broadly flat compared with December 2020. Whilst unemployment forecasts are improving, there is uncertainty with regard to the impact of furlough ceasing at the end of September on our customers specifically. The Vanquis Bank charge-offs during H1 have been approximately half of the normal level, and therefore, they have been normalized to the previous level, as you can see in the waterfall. If the delinquency and repayment metrics remain stable post furlough, then this could allow for ECL releases in Q4 2021 and into 2022. Slide 27, unsurprisingly, credit card spend has been lower post-COVID, which has led to a 32% reduction in receivables since December 2019. As spend returns to pre-COVID levels, we expect to see balances rise. The motor finance book has grown by 26% since 2019 and is set to continue to grow in line with consumer demand in used cars with improving credit metrics. The growth from the market will drive an accelerated Stage 1 change -- charge in the IFRS 9 provisioning, of course, which will utilize proportionally more capital at that point. Turning to capital on Slide 28. Capital ratios remained appropriate at 32.5% post CCD closure and scheme costs for the expected growth over the next 3 years, which will include the Stage 1 IFRS 9 charges that are necessitated as well as the unwound of various IFRS 9 transitional adjustments to allow the business to regrow the lost receivables due to COVID and push forward in our chosen underserved markets. Overall reducing credit and regulatory risk in the group should deliver improved capital generation to allow the group to consider increased deployment of capital in the execution of the group strategy as well as a return to dividend payments. Slide 29. As mentioned earlier, we have focused on delivering a very strong liquidity position for both Vanquis Bank and the group. This has been facilitated by moving our treasury function to an integrated group-wide function under the new group treasurer. This slide shows the steps we have taken to strengthen liquidity position with a large buffer to liquidity coverage ratio, which is at 472% against a limit of 100%. The upsizing of the Moneybarn securitization facility through a higher advance rate at a broadly unchanged cost of funding demonstrates the quality of collateral available to the market and the creditworthiness of the group to the debt capital markets. We continue to diversify our funding sources with the addition of the Bank of England funding schemes, which, as I mentioned earlier, have last week accepted the Vanquis Bank credit card AAA notes as suitable collateral. We improved capacity during 2020, allowing the nonbank group to end the year with GBP 144 million of available liquidity. We have now further improved the undrawn capacity to end H1 2021 to GBP 226 million, excluding the Bank of England facilities that remain undrawn. Slide 30. As a result of the treasury work we've completed in H1, we have been able to successfully remove any refinancing of facilities in a nonbank group to 2023 onwards. We're completing our EMTN documentation to allow for potential Tier 2 issuance when market conditions and pricing allow. We are working towards an application to the PRA to allow broader use of deposits within the group such that future refinancing could be undertaken using deposits funding. So in conclusion, H1 '21 has been a very demanding period for the group financially, but also very rewarding in terms of achieving the goals that we set ourselves such as the CCD scheme with a managed runoff. We've continued to navigate these difficult times with a strong focus on credit risk, capital and liquidity, whilst targeting the objectives set out in the Capital Markets Day in 2019 and specifically a return on equity of between 20% to 25%, with receivables growing an appropriately sized addressable markets. We will continue to focus on costs through considering our operating and governance models as well as funding and capital efficiencies to support our strategic goals as economic conditions allow. I'll now pass you back to Malcolm to talk about our strategy and outlook.

Thanks, Neeraj. That was an excellent summary. It's very encouraging to see the improved set of customer trends during the first half, and I'm fully confident that's going to continue into the second. Slide 31 shows that we are rapidly transitioning into a specialist bank serving underserved customers in the mid-cost credit market. We're strongly positioned to deliver long-term sustainable returns for shareholders. And that's underpinned, in my mind, by 3 key factors. Firstly, factor number one, as you can see, we're focused on 3 core products: credit cards, vehicle finance and personal loans. In aggregate, the mid-cost market opportunity in these products totals over GBP 16 billion. And our receivables book was just over 10th of this. So we've got plenty of growth to go for. Factor number 2 shows that PFG is underpinned by a very strong balance sheet with a diverse range of funding options, including retail deposits, which is a key strategic deposit advantage to us as well as having access to wholesale funding. Turning to Factor #3 and our third box on this slide. The combination of the right products in growing markets, supported by balance sheet capitalized for growth, will enable us to deliver long-term sustainable returns for our shareholders. And on this point rather, the Board and I will update the market as to our dividend policy, as we said, with our full year results. Slide 32, I think, is a really important slide, and it shows why we believe we'll be successful in our chosen markets. The slide outlines our competitive advantages that we feel we have across the credit card, vehicle finance and personal loan businesses. The total size of those markets and our market share within them. As flagged earlier, the market opportunity in the mid-cost space is around GBP 16 billion. And after the Woolard Review, it chimes very much with the regulatory line of travel. In credit cards and vehicle finance, we've established businesses on scalable platforms with much more to go for. In personal loans, as our new open market offering and products go live in the fourth quarter, we will, over time, aim to increase our market share using our scalable loans platform. The slide as well as showing opportunities in our chosen market also shows why we think we'll be successful there and deliver for our customers and our shareholders. I won't go through each point individually and to deliver growth, we'll also need to invest in each proposition. That said, as you can see, we believe that we have market-leading capabilities across underwriting, collections, distribution, coupled with a deep understanding of our customers and their behaviors. We have a strong brand, a funding advantage driven through our banking license and are investing in our platforms and IT to deliver growth and improve customer experience. The next slide, Slide 32, sets out some of the initiatives we're implementing across the group to deliver our strategy with their focus on growth and delivering long-term sustainable shareholder returns. We are, therefore, investing in our new -- in a new group IT platform, enabling growth for our unsecured personal loans proposition with optionality for other group products and have continued to invest in our talented key hires to drive this group forward. Post our exit from the high-cost short-term credit market and the eventual closure of CCD, we are now looking at how we can optimize the structure and government strategy for the group, and this will ensure that we're taking advantage of all the opportunities this change brings. And we've already begun to optimize our funding as we learned from Neeraj, including group and product. Turning to customers. We are expanding in the unsecured personal loans market in the fourth quarter of this year. It's a significant growth opportunity for us and also exiting completely the high-cost short-term credit market. These changes put us in the right product markets and also the right part of those markets, mid-cost credit, being the only specialized bank in this space is a great opportunity for us. Turning to the last bullet point, well positioned for growth. I expect the sector to consolidate post-pandemic. This will bring organic and inorganic opportunities our way, which, with our balance sheet and our unique position as the only specialist bank in the mid-cost space, we can take advantage of if we choose. Finally, turning to Slide 34. We feel cautiously optimistic about the future. The court has sanctioned the scheme of arrangement for CCD and the managed wind down and closure of the business is well on track. PFG will accelerate its transition to becoming the leading specialist bank focused on serving underserved customers in the mid-cost market and has various initiatives outlined today, which will build on our banking platform. We have seen customer lending increase since the easing of lockdown began, with Moneybarn lending to levels that we saw in 2019 and 2020. And bear in mind, 2020 was a record year for them. For Vanquis, as at June, the credit card lending was back above average levels for 2019, except for holiday and recreation. Also, as I've discussed in this presentation, our personal loans proposition will expand in quarter 4 of this year and will go into the open market. That said, we remain cautious about the possible economic shifts that could happen when the government started to draw. And I know, I never mention this anymore, but Brexit has still not worked its way through the U.K. economy. However, once furloughing has been fully withdrawn, and we know the impact of unemployment, we'll obviously assess the impact of that, as you've heard from Neeraj, on our coverage ratios. Turning again to dividends. The Board will evaluate our dividend policy and provide an update with our full year results when we'll have greater line of sight on the economic environment. At the Capital Market Day, which we plan to hold in the first quarter of 2022, we'll also update the market on our key metrics going forward within our capital management framework. Going forward, I'm convinced that we have the right strategy in place with the capital and divestiture funding to support our products and distribution, enabling us to grow PFG by building a broader bank for the underserved customer and delivering, obviously, attractive long-term sustainable returns for our shareholders. Thank you very much for listening today. We'll obviously now take questions, and that will be run by our moderator, Rosie. Rosie, over to you.

[Operator Instructions] And the first question comes from the line of Michael Sanderson from Barclays.

Couple of questions if that is okay? The first one was, you've set out, just to understand the situation on the enforcement investigation, you set out a provision there of GBP 5 million. Just interested to know how that number you're -- comfortable with what level of process you are because you seem -- it's quite a long way off the completion of it. So just trying to understand the dynamics about that if you could possibly talk me through that a little bit? The second one was just understanding the new loans proposition. I mean you talked about going open market and then sort of building up to the mid cost piece. I'd be interested to hear the sort of time frame to the various pieces? And I suppose also interested to understand the sort of the competitive differentiator, I suppose, in the early launch into the lower cost areas of the credit and where you think you'll differentiate? And then finally, one more, if I can just be cheeky. The world of regulation, thank you for the slide there. I mean, clearly, regulation has certainly hit large chunks of the industry pretty hard over the last 5 years. There are obviously -- this causes concern, I think obviously, for a lot of investors. And I'm just interested to know whether you think, a, per the FCA sort of understands that the overhang it sort of brings to the sector and sort of, secondly, how you think -- whether you think it's a more settled environment now that we're looking to over the next couple of years?

Thank you very much. Three very good questions. First of all, the enforcement, second question. The enforcement investigation is for a very short period of time from loans that were made between February through to February 2021. We don't believe that there is any case to answer. But obviously, these investigations have to run their course. However, we've looked at the, if you like, the worst case scenario as we see it. We haven't obviously entered into any discussions with the FCA as to -- as the numbers or anything yet. And we just felt it was prudent at this stage to set aside GBP 5 million as we thought the worst outcome, because I think it takes away, from the market, the inevitable speculation that one has when you have an unnamed parameters around an investigation. And the -- so it's a short period of time, and we've looked at the lending we did and if we don't agree with the enforcement claims. But in worst case scenario, that's what we think reliability could -- the worst case be. In terms of the new loans, that's a very interesting question. I mean, I firmly believe our sort of customers need to have access to 3 categories of borrowing. So that's a basic statement. Obviously, they need some sort of revolving credit facility, a credit card to deal with day-to-day expenditure. In terms of longer-term borrowings, our customers are not typically house owners, so they don't really address the mortgage market, but the one secured asset that they do buy that should be funded by secured lending, obviously, is the vehicle, which is why we've got to Moneybarn. But also I think there is increasingly the case that our sort of customers need to have the ability to access subject to their credit status. Term loans. Now you asked the question on which end of the market will be starting. The first loans that we will look at doing through our test marketing in the fourth quarter will be towards the lower end of the APR spectrum, probably 25% to 30% sort of APRs. And those loans are typically bought by people by going to comparison websites. As you move up through the APR schedule lending to people who have met the credit status, you have to do far more affordability checks, and that is something that one will be doing. It's a natural target base for us. And so we'll roll those out starting from the fourth quarter. The -- we're going to the open market loans, first of all, but equally, there is considerable scope. We've got a number of customers who already borrowed from third parties. We know and assess them when we look at their credit to give them a credit card. So that's another segment of the market, which we can go to. And then obviously, one of the other areas that we need to look at is where we have a situation where customers build up large balances on their credit cards. They should be able to convert those into personal loan. So the scope for the actual market is quite large, in our opinion. So that's the second question. And then finally, you asked about the world of regulation. I think the FCA does understand that one has to strike a sensible balance between regulation and making a commercial return, if they want to have this segment of the market having access to credit. I think that their focus has been in regulation very much over the last few years on the high cost short-term credit end of the market. And you saw the encouragement that the Woolard Review gave to the mid-cost market, which is one of the reasons why -- well, a number of reasons why, but one of the reasons we moved away from CCD and the high cost end of the market. I think it will now, for us, be a more settled environment. But I think regulation always evolves. And so you can never dismiss it. I think one of the important things to do is to make sure that you, as far as possible, maintain a very professional and strong good relationship with the regulator and help them understand some of the policy decisions that they have to make. So I think it will be, for us, more settled as we've moved away from the high-cost sector, but I don't think it will ever stop evolving. Hope that answers your question.

[Operator Instructions] And the next question comes from the line of Gary Greenwood from Shore Capital.

I just wanted to ask about cost dynamics. You talked about investing in IT platforms. I presume there's going to also be sort of volume-related increases as well associated with the pickup in business. I note that costs grew quite sharply in both Vanquis Bank and Moneybarn in the first half of the year. So I was just wondering if you could talk a little bit more about how you see costs evolving going forward, whether there's an element of one-off investment within the cost in the first half of the year? Or whether we should think about first half costs as being a sustainable run rate going forward?

I'll start and then I'll let Neeraj jump in. I mean, I think, yes, in the first half, there was an element of one-off cost because one of the things we've done is evolve a new platform for putting the personal loans business onto, I mentioned in my presentation. And I think the -- that is -- that platform that we've evolved is also capable over time of allowing us to migrate other group products onto it. So there was an element of that. Neeraj, do you want to look at the broader second half direction?

Yes. Thanks, Malcolm. Thanks, Gary, for your question. I think as you point out, there's some volume dynamics that will play out in H2 as we kind of grow back to where we want to be. And I think the other point is, that we have been investing in platform software. Malcolm has mentioned Gateway, which is part of the loads platform piece. Now as you know, most of the way the software works nowadays is delivering software as a service rather than as an asset that's been created internally. And because of that nature of the way that platforms are now developed using cloud computing, et cetera, the accounting convention is that we have to write those costs off during the period we incurred rather than capitalize it, and that used to be the case, with software that was developed in-house rather than being used in this particular way. So what you find is that there is an increase in cost as we develop out those kind of solutions, which won't be a sustained cost and ultimately, cost-to-income ratio will benefit from both income increasing and the receivables going back and the costs coming back over the next couple of years to a level post that investment, which then takes advantage of that investment, which again would lead us to a more efficient place.

That's wonderful.

The next question comes from the line of Robert Sage from Peel Hunt.

I was wondering if you could talk a little bit about pricing dynamics and competition in the motor finance, , i.e., Moneybarn business, whether you're seeing an increase in competition, what's happening to your sort of lending rates and how you might expect to see that develop in the second half of the year?

Thanks, Robert. I mean, it's a good question. I mean, -- If you look over the course of the pandemic, I think we definitely benefited in 2020 with a number of lenders in the sector withdrawing quite quickly from it. We stayed lending all the way through 2020. We also found that we were able to tighten. And then if you have a way, you have the way to evaluate loans within Moneybarn. We've historically had 9 buckets of credit quality, 181C, 282C and 3A to 3C. We've really -- we've stopped lending into buckets 3B and 3C and now lend, to a lot lesser extent, into 3A. And that has meant inevitably, the historic business, the quality of the book has started to improve. Secondly, one of the dynamics we found was that we've seen a lot more -- the loans that we've issued in both last year and in the first half of this year to -- I mentioned it in my presentation to key workers. And I think, typically speaking, without overly generalizing, they are a better credit quality than the traditional money of our customer. These are people who I think, my logic as to why they're interested in taking out these loans, is that they're not yet confident to go onto public transport. So they're buying sort of a second car to get to work. We haven't seen a lot of competition coming into the market at the higher rates as we've consciously tried to move towards the prime -- near-prime market. But there was a period of time there was no one there. But recently, there's no doubt that people like advantage, which is a [indiscernible] of SMU, it has started to come back into the market. But it hasn't yet manifested itself in us feeling a need to change the rates that we're offering. So that's the dynamic that we're facing at the moment.