The Financial Conduct Authority has said it will not block an effort by Provident Financial to cap compensation payouts to customers who were mistreated by its doorstep lending division, despite believing the plan is “inconsistent” with the regulator’s rules and objectives.

Provident, the UK’s largest subprime lender, is seeking court approval for a “scheme of arrangement” to deal with a backlog of historic complaints. In a letter sent to Provident on Tuesday evening and published on Wednesday morning, the FCA said it had several “serious concerns” about the plan, but said it would not appear in court to argue against it.

The decision contrasts with its treatment of rival subprime lender Amigo Loans, which attempted to win approval for a similar compensation scheme earlier this year.

Amigo has spent the past two months attempting to find an alternative arrangement to help it avoid administration, after the FCA argued that it would unfairly benefit shareholders at the expense of customers.

The FCA said in Tuesday’s letter that it would launch a broader consultation later this year on schemes of arrangement and other restructuring tools due to concerns that companies are using them to avoid liabilities.

Under Provident’s proposed scheme, customers are expected to receive a fraction of the compensation payouts they are owed. The FCA said the £50m Provident had allocated the scheme was a “potentially arbitrary figure” and said the group could have paid more.

However, it decided not to block the plan in part because Provident has said it will close down the doorstep lending division entirely, meaning that unlike in the case of Amigo, “the group and its stakeholders will not be retaining a valuable stake in a continuing profitable business at the expense of redress creditors”.

Malcolm Le May, Provident’s chief executive, said the FCA made “the right decision for [the consumer lending division’s] customers” because the most likely alternative was insolvency proceedings that would lead to no compensation payouts at all.

Shares in Provident, which is also being investigated by the FCA over the way it assessed whether loans were affordable, rose 2.3 per cent in early trading on Wednesday.

Gary Greenwood, analyst at Shore Capital, said the FCA’s decision “materially increases the probability that Provident’s scheme will succeed and thus allow the group to move forward in a positive manner”.

He added that “while the letter may seem harsh on Provident, we think that it is perhaps also important in acting as a deterrent to any other companies that may be seeking to pursue a similar Scheme of Arrangement to avoid paying out customer claims in full in future”.