UPDATE – the FCA opposed Amigo’s first Scheme on the ground that it was not the fairest possible for customers. The Scheme was rejected by the court in May 2021. Amigo proposed a new Scheme in December 2021, see Amigo’s Second Scheme for the latest news.
If Amigo’s proposed first Scheme of Arrangement is allowed to go forward by the Financial Conduct Authority (FCA), what would be the impact on the guarantor market and the wider bad credit market?
This article looks at whether other lenders would also seek the protection of a Scheme and the implications for competition in the market.
Who will be the next lender to ask for a Scheme?
Amigo has been reticent about its current complaint numbers, but:
- 25,000 complaints were handled between May and October 2020 as part of their undertaking to the FCA to try to get back on top of complaint-handling;
- FOS currently has 13,000 Amigo complaints and about 500 more are arriving every week;
- Amigo will have open many complaints that haven’t yet been sent to FOS.
But they aren’t the only bad credit lender to be facing this problem. If their Scheme is allowed, why would other lenders who are badly affected by complaints not also ask for one?
A lot of lenders have very high FOS uphold rates against them – payday lenders, guarantor lenders, home credit lenders, large bad credit loan lenders. Some of these may be in serious financial difficulty, but not all.
The next most complained about lender after Amigo on Debt Camel is easily Provident/Satsuma. So far, their financial reports haven’t suggested much difficulty and they own the profitable Vanquis and Moneybarn brands, so paying out a lot of refunds may be manageable.
UPDATE in March 2021, Provident became the next lender to seek the protection of a Scheme to limit refunds to customers. This was approved in August 2021, see How the Provident Scheme will work for details.
What about competition effects?
Does a lender have to be in serious trouble to ask for a Scheme? There is a major competition angle here for the FCA to consider.
If Amigo is allowed to have a Scheme, what about all the other guarantor lenders – why should they be placed at the disadvantage of having to repay refunds in full, when the largest player in their market gets away with only paying a few pence in the pound? Won’t this impact on the other firms’ ability to raise funding? Won’t this depress their share price? Could this lead to other firms facing more financial difficulty than they do at the moment?
When a lender unable to pay refunds goes under, this has a beneficial effect on other lenders in the wider bad credit market. It is cheaper for them to acquire new business, they can carry on paying refunds and they can then afford to reject more marginal applications, so they should have fewer affordability complaints in the future. Generally a virtuous circle. But it seems likely the exact opposite might happen if a firm is allowed to have a Scheme and walk away from its old obligations.
Does it matter if the bad credit market shrinks?
If the Amigo Scheme is rejected and if it goes into administration, a large bad credit lender is removed from the market. Does this actually matter?
In 2014 and 2015 there was a dramatic reduction in High Cost Short Term lending. The FCA’s review in 2017 said:
We had been concerned that consumers who were declined HCSTC might instead turn to other forms of high-cost credit or to illegal money lenders. In line with the CfI findings, we find limited evidence of consumers replacing HCSTC with other forms of formal credit. Around 15% of declined consumers take out an alternative credit product after being declined HCSTC, while around 25% turn to informal forms of credit such as friends or family. We do not find robust evidence that people are increasingly turning to illegal money lenders as a direct result of being declined for HCSTC products. We do see evidence that, for many consumers, being declined access to HCSTC had a positive effect, with 63% stating that they thought it was ‘for the best’.
Amigo has given very few loans since the first lockdown started back in March 2020 and many other bad credit lenders have also paused lending or cut back. Among all the many financial problems that have happened recently, I would suggest that a reduction in bad credit lending has been one of the few areas of consumer benefit.
The first unaffordable bad credit loan tends to generate further borrowing from the same lender or a different one. The next bad credit borrowing may be for more, or at a higher cost. The borrower’s credit record looks worse. After a while, the borrower attempts to consolidate, but at a high-interest rate that is often unaffordable, and bad credit cycle continues.
That first loan may have been needed for some real problem. If it is rejected, the consumer has to find another alternative. But the total size of the bad credit market dramatically overstates the underlying demand because so many of the loans are caused by previous loans.
Bad credit loans in 2021 and 2021 are not an efficient way to help refloat the economy. High debt repayments take away money that would otherwise be spent on goods and services.
It isn’t the FCA’s job to stop firms going bust
On 7 January in its coronavirus financial resilience survey data the FCA said:
“Our role isn’t to prevent firms failing. But where they do, we work to ensure this happens in an orderly way”.
So it is unclear why the FCA could ever think that saving Amigo might be a good idea.
The FCA has always been clear that:
The avoidance of any type of liabilities to consumers is unacceptable … Phoenixing is a common term used to describe the practice of closing a firm and that firm re-appearing under a new guise to avoid liabilities arising from the old firm. Each time this happens, the insolvent company’s assets, but not its debts, are transferred to a new, similar ‘phoenix’ company.
But Amigo’s Scheme looks a lot like a legalised form of phoenixing, with Amigo being allowed to carry on in business with its brand name, customer base and cash whilst capping the redress it has to pay for previous mis-selling at a very low amount.
Where is the possible gain to outweigh the very many problems with this?
- it would distort competition in the bad credit market;
- it could lead to other firms who could carry on paying redress, seeking the benefits of a Scheme;
- it would provide an incentive for firms to delay and prolong complaint handling, including at FOS, knowing they may be able to get it all paid off for pennies later on.