When Amigo announced it was proposing a Scheme of Arrangement in December, it said:
Amigo continues to explore alternative options but it is likely the alternative options would result in those with Redress Claims receiving considerably lower amounts (if any at all) than they would under the Scheme.
But that isn’t correct for one large group of borrowers who would be significantly better off if Amigo went into administration now, rather than into a Scheme when it is set up.
And there are some other groups who may also not be better off in a Scheme.
This article looks at who could be worse off in a Scheme and how Amigo could correct this.
Most borrowers with a current loan would be better off in administration now
In administration, if a customer has their Claim for a refund upheld and they also have an outstanding balance then their balance is reduced by the refund and they will get a small percentage of the cash refund amount. And if they have made payments after the Scheme started, these payments are refunded in full.
In the Amigo Scheme, exactly the same will apply: a balance reduction, a small amount of the cash refund amount and payments made since the start of the Scheme repaid in full.
Amigo expects the “small percentage to be larger in the case of the Scheme than administration – that may well be correct.
However the big difference is in the potential start date of the Scheme.
Amigo could go into administration tomorrow. So all future payments will be repaid in full to a customer whose complaint is upheld.
I expect the Scheme will take three to six months to set up. During that time, most borrowers will be making payments to Amigo and their balance will be dropping.
A borrower whose balance is already less than their refund amount, or drops to being less in the next few months, will lose out by making all these extra months payments that they will not get back in full.
A worked example
Ms A borrowed £4000 over three years from Amigo. She has made 24 monthly payments of £195 – a total of £4,480.
Let’s assume she would have her Claim upheld in a Scheme and in administration. And ignore statutory interest which will be very small.
If Amigo goes into administration now Ms A would get her balance wiped and a very low amount, possibly zero, of the £480 back in cash. But if she carries on paying while the Administration goes through she will get all her payments from now back in full.
If instead Amigo goes into a scheme in 4 months time, she will have paid £5460 by then. She would have her balance wiped and be assessed as having a refund of £1460 because of the extra payments she has made. But she will only get a small amount of this back. Let us say this is 10% – I think that is extremely optimistic, it’s more likely to be 5%, but let’s say 10% for this calculation. Ms A would get a cash refund of £146 but she will get 4 months fewer monthly payments back in full as the Scheme started later, so she will have lost £780 there.
Overall Ms A will be £634 worse off under the Scheme.
If the Scheme takes longer to set up or pays out less than 10% she will lose even more money.
This will affect tens of thousands of people
When I worked out some numbers for likely refunds, my estimate was that:
Of the 150,000 people with a current loan, roughly one-third of the ones who only had one loan and who hadn’t taken a Covid-19 payment break would still owe a balance and two-thirds wouldn’t after redress.
Customers with two or more loans are even more likely to get caught in this trap as their refunds may be higher.
Not all of these customers will have a complaint upheld of course – but a very large number should.
So I think there are likely to be tens of thousands of borrowers who will be better off if Amigo goes into administration now, rather than into a Scheme.
All guarantors making payments would be better off in administration now
A similar argument applies to guarantors who are currently making payments who have their Claim upheld. They will not have any balance reduction as if their claim is upheld they do not owe a balance at all. Instead they will receive all their refund in cash and in the Scheme that will be paid at the very low pence in the pound rate.
But they will have a refund in full of all payments they have made since the Scheme started. And in administration they will get a refund of all the payments made since the start of administration, which can be several months more refunds if administration is now.
Some other customers may be better off in administration
There are three other groups of customers who may potentially be better off in administration, but these are less certain as it depends on how Amigo will uphold complaints and assess the redress.
- Anyone with a balance owed will be better off in administration if their claim is rejected in the Scheme but upheld in administration. In administration the administrators normally try to replicate FOS decision making as far as they can – Amigo has not yet confirmed if they expect to uphold the same large number of Claims that FOS does.
- Anyone with a balance owed will be better off in administration if Amigo uses a redress calculation that does not match FOS’s eg by applying a deduction for unpaid interested, Amigo has not yet said anything about this.
- Any borrower with default or a missed payment on their credit record will benefit from having that removed. This may be of far more value than a small cash refund… so if more Claims are upheld in administration more people may benefit from this.
Amigo can put this right simply – if it wants to
The Scheme date problem can be easily resolved by Amigo in one of three ways:
- it can stop collecting repayments now from customers until claims have been determined in the Scheme;
- it can stop collecting payments now from customers who have made a complaint; or
- it can set up the Scheme so that customers whose claim is upheld get a full refund of payments paid from now, not from the start date of the Scheme.
But doing any of these will cost Amigo a lot of money.
In the recent half-year results Amigio received £92m in loan repayments in six months. That was depressed by Covid-19 payment holidays, most of which will have unwound by now so this should increase over the next 6 months, although there will be some reduction as some loans are repaid. It seems reasonable to expect Amigo to be earning at least £15m a month for the next few months from loan repayments.
A very large number of people with current balances may win Claims. If that is 50% and the Scheme takes four months to set up, Amigo will gain £30m from having collected the extra four months payments and not refunded them.
And of course these customers will lose £30m. This is more than the money Amigo is proposing to put into the pot for cash redress payments!
At the moment Amigo is proposing to profit from this period before the Scheme is set up and the winners will be the Amigo bondholders and shareholders.
The FCA should make up its mind quickly!
The scale of the amount customers may lose because of the delay in setting up the Scheme suggests that the FCA should make up its mind quickly on whether the Scheme should go ahead. Because if it decides No, then it is better for administration to start as soon as possible.
How to make an affordability complaint about a guarantor loan
Amigo’s Scheme (1) timetable for approval & how it may work
Amigo’s Scheme – who’s next? Implications for the bad credit market
Is Amigo allowed to delay paying refunds? Does it have a DISP waiver?