Amigo won’t give details about complaints in July 2020

This article summarises three articles that looked at how Amigo has reported to shareholders about complaint numbers in 2019 and early 2020

Affordability complaints about guarantor loans

First, as background, what are these complaints about? Although the existence of the guarantor gives Amigo additional comfort it will be paid, the loan still has to be affordable for the borrower. If a loan is found to be unaffordable for the borrower, the guarantor is released and any repayments the guarantor has made are refunded in full.

The loan also has to be affordable for the guarantor. Many guarantors have houses, but this does not change the Amigo’s obligation to check the loan can be repaid from the guarantor’s income.

Guarantors may have other reasons to complain and ask to be released as the guarantor, for example if the responsibilities of a guarantor were not properly explained.

Amigo started getting increasing numbers of affordability complaints from the second half of 2018, at this point the numbers were small and very few were upheld by the Financial Ombudsman (FOS).

In 2019, FOS issued two lead decisions, one for an affordability complaint by a borrower and one by a guarantor. These decisions set out what FOS would look for in guarantor loan affordability complaints.

After this FOS started upholding the large majority of guarantor loan complaints. In the second half of 2019, it upheld 94% of Amigo cases.

Amigo 2019 first quarter (April-June)

On 29 August 2019, Amigo published its financial results for the April-Jun 2019 quarter.

I wanted to see how Amigo was going to refer to the very high percentage of complaints against it which have been upheld by the Financial Ombudsman, over 80%, and whether Amigo is making any changes because of this. Here are some extracts, together with my comments.

We have recognised a provision of £2.0m relating to expected losses arising from existing customer complaints. 

I think the phrase “existing customer complaints” means the £2million provision is for the complaints that are already in progress. It’s not an estimate of the cost of future complaints by existing customers.

We have seen an increase in the number found in favour of the customer by the Financial Ombudsman and have updated the way we investigate these cases.

Amigo doesn’t give the statistics on the uphold rate at FOS for Amigo complaints in the last quarter. I think investors would be interested in that number. And in how many complaints Amigo has received in the last quarter.

Amigo’s cost:income ratio has increased to 23.4% for the quarter (Q1 FY19 17.5%). This is due to the investment in our people and processes and a provision we have recognised for customer complaints. 

That is a significant increase in costs in one quarter.

Responding to an evolving regulatory and economic environment, while recognising the continued strong demand for our product, we are taking the following positive action:

• New customer lending is being prioritised over relending to existing customers
• We have further enhanced and tightened our credit policy
• We are investing across key internal functions: operations, compliance and complaints.

All these moves should lead to lower numbers of unaffordable loans being given in future. Amigo notes the FCA’s concerns about repeat lending. I think all requests for top-up loans should be investigated very carefully – does the customer need more money because the first Amigo loan is causing them financial difficulty?

We have taken the decision to amend guidance for FY20 for… Net loan book growth: Broadly flat

That is a significant drop from the Annual Report guidance which said “we will now target low-teen net loan book growth.” 

Amigo 2019 half year results for April- September 2019

These  half-year results  show a big increase in complaint costs about its guarantor loans. The majority of these complaints are affordability complaints, by the borrower or by the guarantor.

Here is the management presentation on the results.

What Amigo says about complaints

Some thoughts on the points Amigo makes about complaints in the management presentation and in the investor webcast:

The provision includes a combination of estimated redress for known open cases and an allowance for future claims.

Amigo was asked in the webcast how this was broken down between current and future complaints. They declined to answer because of commercial sensitivity. A question was asked about the accuracy of provisioning for complaint costs. Amigo said it was too early to say as the first provision was in Q1. The current provision only includes a “portion” of complaints they may see in the future.

I don’t think those are satisfactory answers for investors. Was there a provision for the FOS backlog of complaints in the Q1 results – if not, why not? What is the average redress cost of a complaint? How many new complaints are being received each month and what is the trend on this? How large is the “portion” there is a provision for – there is a lot of difference between 20% or 80%.

We have reviewed our complaints process in detail and examined the root cause of complaints received.

The FCA’s DISP rules say a firm should consider “whether it is fair and reasonable for the firm to undertake proactively a redress or remediation exercise, which may include contacting customers who have not complained.”

I suspect Amigo’s root cause analysis will have identified borrowers who had more than 2 loans and the “pilot lending” program which targetted borrowers with a lower credit score, as two groups of customers who are very likely to have an affordability complaint upheld.

Amigo should be considering an automatic redress program to assess these customers’ cases applying the FOS approach, and refund interest to them if a loan should not have been given.

With the FOS backlog unwinding, we expect to revert to more normalised, lower uphold rates and a reduced average redress.

The number of complaints may fall once the FOS backlog has gone through. Although Amigo seems to be developing an in-house backlog, with customers being told at the end of the 8 week period that Amigo needs two extra weeks to reply to their complaint.

But that shouldn’t affect the decisions on them. Why should new complaints have a lower uphold rate or a lower average redress value?

During the investor webcast, Amigo said that they had taken the decision to “tactically increase the uphold rate to clear the backlog [with FOS]“.

That is very surprising. FOS and the FCA probably thought Amigo had adopted FOS’s approach to determining complaints on a permanent basis, not just to get through the backlog.

If Amigo starts rejecting more complaints or offering refunds on fewer loans, then more complaints will be going through to FOS again.

The fact that less than 10% of payments come from guarantors is evidence that our affordability assessments are working. 

No it isn’t!

The low number of payments by guarantors shows how desperate borrowers are to make payments even when they are unaffordable in order to protect their guarantor. It says nothing about how affordable the loan is for the borrower.

It would also be good to get the statistics on what percentage of guarantors have to make any payments. The “10% of payments are made by guarantors” could mean 20% of guarantors make half the payments on the loans. This is the number that guarantors should warned about at the application stage.

Amigo Full year results  April 2019-March 2020

On 20 July 2020 Amigo published its results for the year ending 31 March 2020.

The financial headlines:

• Amigo made a loss after tax for 2019-20 of £27.2m. For the previous year this had been a profit of £88.6m;
• no guidance on financial performance for 2020-21 was given because it is too early to assess the impact of Covid-19;
• it had cash in the bank of over £135m at 30 June 2020.

I am mainly interested in details of how it is handling complaints. Amigo has recorded a complaints cost of £126.8m and a complaints provision of £117.5m as at the end of the financial year. But they don’t give actual complaint numbers. They say:

we saw the level of complaints begin to increase from Q2 onwards. After the year end, the level of complaints increased substantially, with the majority of complaints coming from claims management companies.

and

The provision is not intended to cover the eventual cost of all future complaints; such cost remain unknown. There is significant uncertainty around: the emergence period for complaints; the activities of claims management companies; and the developing view of the FOS on individual affordability complaints, all of which will significantly affect complaint volumes, uphold rates and redress costs. 

Increasing numbers of Amigo complaints

After FOS issued its key decisions, Amigo then changed to upholding many complaints from customers in line with FOS decisions, as the FCA rules say it should. Complaints numbers started to go up, including complaints through Claim Management Companies.

James Benamor founded Amigo but had retired from the board when it floated on the stock market in 2018, when he owned over 60% of the shares. In December 2019 he went back onto the board. He resigned in March 2020 saying that:

Amigo had, for six months, been lending almost entirely in a way that matched their own complaints team’s definition of ‘irresponsible’.

and advocating that Amigo should take FOS to court for a judicial review. Benamor then called for the board to resign. When he lost these resolutions in June, he started a programme of selling 1% of the company’s shares a day which is continuing.

2020 – a backlog of complaints and the FCA intervenes

Around the start of 2020, Amigo started rejecting almost all complaints and a backlog began to built up. Some of these had been sent to the Ombudsman, others were still with Amigo.

Complaints numbers were increasing as more people heard about them and Claims Management Companies submitted increasing numbers of complaints:

• in May Amigo agreed a Voluntary Requirement with the FCA to work through a backlog of 9000 complaints by the end of June 2020;
• in July Amigo announced that the FCA agreed to extend the period to the end of October 2020, because the number of complaints had “substantially increased”.

On 1 June Amigo announced that the FCA had started an investigation into Amigo’s creditworthiness assessment process and whether it is compatible with regulatory requirements, covering the period from 1 November 2018 to date. Amigo says:

There is significant uncertainty around the impact of this on the business, the assumptions underlying the complaints provision and any future regulatory intervention.

The impact of Covid-19

Before the pandemic, Amigo had already cut back on lending, with tighter underwriting assessments and a reduction in repeat lending to existing customers.

With lockdown, Amigo halted all lending apart from loans to some key workers.

Amigo has given 47,000 customers payment deferrals. The FCA stated that guarantor lenders could not ask guarantors to pay if the borrower is taking a Covid-19 related deferral.

Amigo says it is not adding on extra interest for the first three months break. Borrowers can now ask for a second three months break.

But just how many complaints are there?

Today’s full year results are silent on the current number of complaints and the average cost of settling them.

They give a detailed sensitivity analysis in the accounts looking at the effect if more complaints are upheld or if the average cost of upholding the complaints increases. But they do not say what the current baseline is or what assumptions management have made about future complaint numbers:

• how many complaints did Amigo agree to settle in 2019-20?
• how many has Amigo agreed to settle so far in 2020-21?
• how many does it yet have to make a decision on?
• how many new complaints are arriving each month?
• what percentage is it currently upholding?
• what is the average cost of a complaint it has upheld?

Amigo was asked about some of these numbers in the Investor Webcast following the results. It said it wasn’t disclosing them for commercial reasons.

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