UPDATE – in May 2022, the court approved the new Amigo Scheme.
See Amigo’s Scheme for details
On 13 December 2021, Amigo proposed its new Scheme of Arrangement.
The Practice Statement Letter (PSL) is a 21-page overview of the new Scheme. The numbers in the PSL have now changed
We hope a successful new Scheme will also allow a changed Amigo, under a new management team, the opportunity to bring forward a new, regulated lending proposition for a segment of the market where options are diminishing and demand remains high.
The timetable for approving this Scheme is;
- A court hearing on 16 February 2022 will consider the voting arrangements. This was changed to 8 March.
- Customers will then be able to vote on the new Scheme.
- A court hearing to consider the fairness of Scheme 2.0 is expected to be held in late April 2022. This was changed to the 23 & 24 May.
This article looks at how the new proposal differs from the first Scheme, rejected by the court as unfair to customers. Also, where has the extra money come from? And is this now fair to customers?
The story so far
Affordability complaints and the first Scheme
A loan is only affordable if someone can repay it and still pay their other bills, debts and living expenses. For Amigo’s guarantor loans, this test has to be passed by both the borrower and the guarantor at the time the loan was given.
Amigo affordability checks were often inadequate so it was losing 88% of cases at the Financial Ombudsman (FOS) in 2020.
Amigo couldn’t afford to carry on paying refunds, so it proposed a Scheme of Arrangement in December 2020 to cap the money it had to pay for mis-sold loans. It estimated customers would receive 10% of their calculated refunds – that looked optimistic to me.
Schemes have to go through a three-stage process to be approved. In the case of the first Scheme:
- A court hearing approved the voting arrangements for creditors affected by the Scheme – in this case the Amigo customers who had affordability complaints.
- A large majority of creditors who voted were in favour of the Scheme.
- A second court hearing considered the fairness of the proposed Scheme and the creditor voting and it was rejected.
Why the first Scheme was rejected
Amigo’s previous Scheme was rejected in May 2021 after the FCA opposed it saying:
- the proposed Scheme was too generous to shareholders, who would lose everything in administration, and not fair to customers who would only get a very small proportion of their proper refunds;
- Amigo was not likely to go into administration in the short term, so there was time to negotiate a better Scheme.
The FCA was right – Amigo did not go into administration when the first Scheme was rejected. Since May Amigo has been constructing an alternative Scheme. It set up a committee of 8 customers who were asked which of various options they would prefer.
The new Scheme – it’s complicated…
There are several options
The second Scheme is a lot more complicated than the first one. There are two separate options to be voted on by customers:
- New Business Solution (which may collapse into what the PSL calls the Fallback solution); and
- a Wind Down Solution.
The New Business Solution is Amigo’s preferred option, the Wind Down will only be considered by the court if the New Business Solution is rejected. If neither solution is approved by the court, Amigo will go into administration.
Schemes are not usually structured like this. One criticism of the first Scheme in court was that the documents were not easy to understand for customers – that is going to be even harder with this unusual double-scheme structure.
The Practice Statement Letter (PSL) gives a summary of the options. We won’t know the full details until the Explanatory Statement is published – last time this was not available before the first court hearing.
The numbers in the PSL are now out of date.
The full Explanatory Statement has different numbers –
this makes administration look a more attractive option than it was.
See Amigo’s new Scheme – which way should you vote? [LINK] for details
Here is my summary of what Amigo has said about these options:
15m-35m (+ profit share)
New Business Fallback
Under the New Business solution, Amigo would continue as a lender.
But the PSL does not go into much detail about what will happen under the Fallback and Wind Down options. It doesn’t say if Amigo’s parent company will still continue in business even though the subsidiary that currently gives loans is closed.
I think this should be made clear to customers.
The New Business solution may fail in practice
The New Business solution will only succeed if two conditions are met after the Scheme starts:
- Amigo recommences lending within 9 months of the Scheme starting – this can only happen if the FCA agrees. The FCA is currently assessing if Amigo’s proposed lending will meet the necessary conditions to be approved ; AND
- Amigo raises at least £70m of finance within 12 months of the Scheme starting. Only £15m of this is going into the Scheme to be paid as redress to customers, the rest is for future lending.
So this may not be known until May 2023. Until it is known, no payments can be made by the Scheme.
If the New Business option fails, it changes to the Fallback Scheme which is a version of the Wind Down option.
The PSL doesn’t estimate what customers may get from the Fallback. It depends on when and how the New Business option fails and what Amigo has spent before the failure point. Amigo has NOT said it expects the Fallback will pay out more than the Wind Down or administration options.
It is possible customers could actually end up with more money if they opt for the Wind Down now or reject both scheme options and let Amigo go into administration.
42p sounds like a lot more money but how is it calculated?
42p is an estimate. It could be more, it could be less.
But the PSL says nothing about how the 42p figure was arrived at. You can make this number anything you want by playing around with the figures going into the calculation!
I thought Amigo’s estimate of 10p in the £ in the first Scheme was very optimistic – it could only be right if either few people complained or Amigo rejected a lot of the complaints, many more than the Ombudsman would have.
This matters – a lot. People may vote on the Scheme on the assumption that 42p is right.
I think Amigo needs to be open about the important numbers in the redress calculation:
- how many customers does it expect will make a claim?
- what percentage of claims does Amigo expect it will uphold?
- will Amigo still be applying the unfair “deduction for unpaid interest” that reduces, sometimes dramatically, the refund a customer will get if only their later loans are decided to be unaffordable?
Amigo has said it expects to uphold 65% of claims – but it isn’t clear if that includes cases where it only upholds one loan even though the customer had several. When cases were going to the Ombudsman, 88% were upheld, and the very large majority were for all loans someone had.
Most of the extra money comes from current borrowers NOT shareholders
Amigo is proposing to raise £70m from shareholders, but most of that is for new lending – only £15m will be paid into the new Scheme.
It looks as though the larger amount to be distributed in cash has come mainly from the pockets of the current borrowers.
Amigo had revenue of about £100m from loan repayments by current borrowers in the first 9 months of 2021 and continues to get more every month.
Many of those current borrowers will win complaints in the new Scheme or in administration. They will have lost out badly by this if they win their affordability complaint because balance adjustments are paid “in full” but cash refunds are only paid at a small percentage.
The FCA has ignored the plight of these customers by allowing Amigo to halt complaint handling. Amigo has been telling customers they have to continue to pay. Amigo’s texts and emails have scared many customers into making unaffordable payments to a debt they may not even owe after their complaint is decided.
Amigo could correct this injustice if it wanted to
There is a simple way to put right the harm that has been done to the current borrowers.
The PSL says on page 8 that a Trust Account is being set up for payments made from the end of November 2021. So any payments from now for people who have already complained will be reimbursed in full from now on if a complaint is upheld.
I think this Trust Account should be changed so that it contains all payments made from the announcement of the first Scheme a year ago.
Of course, this would result in the headline “pence in the pound” cash redress paid in the second Scheme dropping considerably. But that would be a fair reflection of how much customers are losing from this Scheme and how little shareholders are contributing.
I hope the FCA will insist on this change to the Trust Account being made.
Is this second Scheme likely to be approved?
What will the voting arrangements be this time?
There was little discussion about the voting arrangements in the first Scheme as the details were hidden away in the long Explanatory Statement which customers only saw after the court hearing that considered the arrangements.
Each creditor’s vote was weighted. This weight was set at the amount of cash redress that would be paid if all loans for the customer were upheld.
That may sound superficially fair… but the vote of a customer who had not yet repaid more than they had borrowed was given a weight of just £1. So the customers who had least to gain from the Scheme and who may have considered they would prefer Amigo to go into administration were effectively disenfranchised.
Perhaps the voting arrangements will be fair this time and reflect the total amount of redress a customer may get, including balance reductions. I hope the FCA will be looking at the details of this as it will see the Explanatory Statement before the first court hearing and could object to the weighting.
What will the FCA say?
The PSL sets out the FCA’s current position. Here is my summary of this:
The FCA has only recently been given the PSL and does not yet have the full details. It may decide to object in court. And it’s trying to assess if Amigo meets its standards for future lending – the FCA may impose requirements which could mean Amigo thinks the Scheme is no longer viable.
So that is unknown!
Is this really a fairer deal for customers?
The judge who rejected the first Scheme concluded by saying:
The FCA expects the directors to continue to explore and promote a restructuring which fairly allocates the benefits and losses among the various stakeholders. I agree with that.
Does this new Scheme fairly allocate the benefits and losses between the customers and the shareholders?
It doesn’t seem to me that it is much of an improvement on the first Scheme, with most of the “extra money” coming from the payments made by current borrowers and only an extra £15m coming from shareholders.
So this isn’t really “extra money” – it is just redistributing money so the current customers get a lot less and the previous customers get a bit more.
The other major problem is that Amigo has given no clues about how it came up with the 42p number.
42p could turn out to be very optimistic. It is essential customers are told the assumptions this estimate was based on. Otherwise they can’t assess how fair this proposed Scheme is.
Comments on this article are now closed.
Please leave comments on the new Amigo’s Scheme – waiting for claims to be decided which will be kept updated.