Bigger fine for firm that mis-sold products

The Financial Conduct Authority told the FTSE 250-listed boiler repair group that it is planning a penalty of £34.5m.

Homeserve, based in Walsall, told investors that it is increasing its provision by £30m to cover the hit.

It said the penalty assumes a 30 per cent discount for settling early.

Shares edged up on the news as investors saw the company taking a major step towards putting its regulatory issues behind it.

Homeserve is led by Richard Harpin, chief executive since 2004, who lives in York.

The company said the notice related to the investigation into historic regulatory issues surrounding sales and marketing, controls and governance and complaints handling.

It said: “Homeserve will now engage in discussions with the FCA to finalise the notice and do not propose making any further comment during these discussions.

“The ongoing activities of the UK business are unaffected by this notice and the business continues to trade in line with expectations.”

Analysts from JP Morgan Cazenove said that while the proposed fine from the FCA was higher than expected, the announcement “should draw a line under the historical issues and allow the group to continue to rebuild the ongoing UK business”.

Analysts from Liberum Capital said customer restitution seems very unlikely and most of the issues relate to historic sales and marketing.

A note said: “There is no change to guidance on trading, but as we indicated in November, in the UK customer growth is ahead and cost savings are on track.

“If the FCA are largely satisfied with the current product and marketing, the business can start to get back on a more even keel.”

Analysts at UBS described the conclusion of the historic investigation, ongoing since late 2011, “a clear positive”.

“With the conclusion of the historic investigation, Homeserve will now revert to a more normal supervisory relationship with the FCA in our view,” said a note.

“Key to the longer-term Homeserve investment case is the stabilisation of UK profits. Key to this is delivering on key performance indicators in the main winter sales-renewals period so in-line trading is reassuring.

“In this respect we view the interim management statement on February 5 as more important than today’s statement.”

Analysts at JP Morgan Cazenove said: “On a positive note, the statement removes an element of uncertainty that had been overhanging the group – with the current UK operations unaffected by the notice – in our view.”

But Numis Securities downgraded the stock to ‘hold’ from ‘buy’. Analyst Mike Murphy said: “We believe the fine is much larger than anticipated and is worth 9p off the price of the stock on a purely cash out basis.”

A spokesman for the Financial Conduct Authority declined to comment.

A final report on the watchdog’s investigation is expected within the next few weeks.

In late November, Homeserve reported a £19m hit for customer compensation for alleged mis-selling.

The company admitted it under-estimated the compensation bill for customers who were sold policies dating back to 2005.

The extra charge came on top of £21m already put by so far for compensation and the cost of overhauling working practices. Homeserve reported another slide in the number of UK customers, down a further 12 per cent to 2.2m.

It hopes that customer numbers will bottom out at a slightly higher-than-expected 2m from March as its rate of retaining new customers increased to 81 per cent, although this is still down sharply on the 3m seen in late 2011.

The drop in customers left UK revenues 5.4 per cent lower at £127.2m in the half-year, it said on November 19.

Speaking at the time, JM Barry Gibson, chairman, said: “Homeserve has made a positive start to 2014 and this has given us increased confidence in our ability to deliver our current and medium term plans.

“We expect UK customer numbers to stabilise from March 2014 and as we continue to develop and grow our international businesses, we expect the group to return to modest growth in 2015.”

Homeserve, formerly known as Fastfix, was investigated by industry regulator Ofcom in 2012, on allegations that its call centre staff were calling customers and then abandoning the calls, leaving potential clients with a silent line.

Following the allegation, the company laid off 200 employees. Ofcom imposed a fine of £750,000 on Homeserve.

The company, which was founded as a joint venture with South Staffordshire Water in 1993, provides maintenance services to 4.9m households across the UK, France, Spain and the United States.

Analysts at JP Morgan Cazenove said: “While the FCA investigation is not complete, we believe that a line in the sand has been drawn with respect to any potential fine that the group may receive with a provision of £6m made with the full year results for 2013.

“Following the strong share price in the year to date, with renewals and profits being heavily weighted to the second half and a manageable outcome from the FCA investigation already being factored into the share price, we believe a neutral recommendation is appropriate at this stage.”

The investment bank said Homeserve could benefit from a faster rate of growth in the US business, private equity interest and the signing of a new partner in France to help increase sales.

@bernardginns

Recognition of a rising star

BACK in 2008, Richard Harpin was being feted as one of the country’s best businessmen.

Ernst & Young, the Big Four accountancy firm, named him UK Overall Entrepreneur Of The Year.

He founded Homeserve in 1993 with an investment of £100,000, was appointed to the board in 2001 and became chief executive in 2004.

He previously held roles at Procter & Gamble and accountancy firm Deloitte.

Mr Harpin, who lives in York and flies a helicopter, launched The Enterprise Trust, a charity to help provide budding entrepreneurs with advice and resources.