The Competition and Markets Authority (CMA) said on Tuesday it had served the companies with an initial enforcement order, put in place to prevent the businesses from integrating after a possible merger while the watchdog decides if it needs to launch an investigation.

British lender Provident on Monday rejected a £1.3 billion takeover bid launched by its former CEO and said it was looking for a better solution to turn around its business.

Smaller rival Non-Standard Finance (NSF), led by ex-Provident boss John van Kuffeler, announced on Friday that it had offered to buy Provident, which has run into trouble with regulators worried about the rates it charges on loans.

While an initial enforcement order does not stop Provident and NSF from signing a deal, it prevents the firms from integrating, exchanging money or moving assets. NSF also remains free to approach its rival with another offer.

"The CMA statement highlights the risks that shareholders need to consider as they weigh up NSF's offer," a spokeswoman for Provident said in an email.

A spokesman for NSF said that the company had discussed its offer with regulators and the talks remained ongoing.

Provident and NSF provide short-term loans to consumers who might otherwise struggle to borrow from more mainstream banks. British lawmakers want to rein in the high interest rates such firms charge on borrowing by often vulnerable people.

Provident's share price has tumbled 75 percent in the last two years, hit by a botched reorganisation of its home credit business which led to profit warnings, the departure of its CEO, the suspension of dividends and regulatory issues.

Provident Financial investo
rs look for respite after botched reorganisation:

The watchdog on Tuesday asked NSF not to take any actions that might lead to the integration of the two businesses, transfer control of the firms or their units or stop the firms from competing independently in any of the markets affected by a deal.

The watchdog also asked the firms to stick to their the pre-merger business plans, with no extraordinary management changes or asset sales. The CMA also put the brakes on any changes to existing contracts.

NSF already plans to demerge Provident's home credit business and Loans at Home to assist with Britain's competition watchdog's approval process.

"We expect that it will be a rough ride over the coming weeks/months but (believe) that the offer will ultimately succeed ... NSF has enough tools in its box to mitigate against sweetening the terms," Goodbody analysts said.

Goodbody also said a counter-bidder could emerge for either of the lenders.

NSF, founded only five years ago by van Kuffeler, has a market value of only £194 million, but has the backing of several Provident shareholders including British fund manager Neil Woodford for the bid.

(Reporting by Noor Zainab Hussain in Bengaluru; Editing by Bernard Orr/Keith Weir)

By Noor Zainab Hussain