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.
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.
What is an affordability complaint?
The FCA – and the previous regulator, the OFT – says that a lender has to make proportionate checks that a loan is going to be affordable for the borrower. A loan is only affordable if it is likely the repayments can be made without the borrower having to borrow more money to afford them and without getting behind in their other debts and essential bills.
FOS has set out how it handles affordability complaints here: Unaffordable lending.
If a customer wins a complaint, they are refunded the interest they have paid. For an outstanding loan, the balance is changed so they only have to repay what they borrowed.
In the last two years, affordability complaints have caused the failure of the largest three UK payday lenders: Wonga, QuickQuid and the Money Shop and a string of smaller ones. And they contributed to BrightHouse’s collapse this year.
Affordability complaints for guarantor loans
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.
Increasing numbers of Amigo complaints
Amigo started getting increasing numbers of affordability complaints from the second half of 2018 but at this point the numbers were small.
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 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 Complaint 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.
Just how many complaints are there?
Today’s 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.