Amigo announced on 21 December 2020 that it is seeking approval for a Scheme of Arrangement in order to cap the amount it has to pay to customers who were mis-sold unaffordable loans. It has put up a FAQ page on its website. The announcement says:
Whilst the Scheme will not enable all claims relating to customer redress issues arising from unaffordable lending (“Redress Claims”) to be paid in full, the Directors have now decided that a Scheme is the best vehicle for addressing customer Redress Claims.
In 2020 Amigo has been trying to get on top of increasing numbers of affordability complaints by borrowers and guarantors. In its half-year results in November, it said:
Amigo is working with advisers to review options, that are acceptable to all stakeholders, to address the current level of complaints. While at an early stage, this includes assessing the use of a scheme of arrangement as a potential vehicle for customer redress.
So today’s announcement is no surprise.
Amigo wants to restrict the money available to settle affordability complaints. It says:
The Company anticipates the immediate cash payment under the Scheme towards the Redress Claims Pool will be £15 million, with the option for this to increase should the anticipated Balance Adjustments be less than expected, up to an extra £20 million of cash. In addition, the Company will make a cash contribution to the Scheme based on 5% of profit for the next three financial years ending 31 March 2024. In light of the cash contribution to the Scheme and the Balance Adjustments to the loan book, the Company believes the requirement for the current unutilised complaints provisions remains in line with expectation.
It isn’t clear what that means. Is it saying the current provision in the accounts is expected to be used for customers with balances that are written off, and that customers with settled loans who need a cash refund will be limited to £15-35million? If so, that sounds entirely inadequate.
Amigo wants to stop complaint handling while the Scheme is being approved, proposing it will only settle complaints where it has already made a Final Response offer or where the Financial Ombudsman (FOS) has made a Final Decision, ie not an adjudicator decision. This would be in breach of the Financial Conduct Authority (FCA)’s DISP rules, so Amigo is asking for a waiver from these.
The announcement says:
the Directors consider that Amigo has adequate liquidity for the medium term … The Board is confident that it will be able to restart lending in early 2021.
This article looks at the background to this, how a Scheme works, the details Amigo needs to provide, the questions the FCA needs to consider, and the worries customers may have.
What is an affordability complaint?
The regulator says that a loan is unaffordable if making the repayments means you have to borrow more money or get behind with essential bills.
For guarantor loans:
- the lender has to check the loan is affordable for both the borrower and the guarantor;
- when a borrower wins an affordability complaint, interest is refunded;
- when a guarantor wins a complaint, they are released from the loan and all payments they made are refunded;
- because guarantor loans are large, complaints are often won about a single loan, even if all the payments were made on time.
In 2019 FOS published two key decisions on Amigo cases: one by a borrower and one by a guarantor. It has set out how it decides guarantor loan complaints here. FOS is currently upholding 88% of guarantor loan complaints.
2020 – Amigo complaints jump & other problems
Complaint numbers began to increase significantly from the start of 2020.
From March to September there was a board room dispute about how Amigo should handle complaints. James Benamor, Amigo’s founder, resigned from the Board and said Amigo should challenge FOS decisions in a judicial review. Benamor did not regain control of the board and by November a new board and CEO were in place.
In May, Amigo agreed to a Voluntary Requirement (VReq) with the FCA to work through a backlog of c. 9,000 complaints by the end of June. But complaint numbers increased and Amigo asked for an extension. In November Amigo said that it had made a decision on c. 25,000 complaints included within the extended VReq.
Complaints are not the only issue facing Amigo:
- with Covid-19, Amigo faced the difficulty of assessing a loan application when the person applying may lose a lot of their income. Amigo restricted lending to key workers, which was a very small number of loans. In November all lending stopped.
- the FCA began an investigation into Amigo’s creditworthiness assessments in June. There is no indication when this will be completed.
How Schemes of Arrangement work
A Scheme is a legal device that allows a firm to vary the rights of some or all of its creditors and/or shareholders.
In a Scheme, creditors are divided into classes. The classes will typically be treated differently in a Scheme. The creditors in each class have to vote to approve the Scheme which must be passed by 75% of the creditors in that class. Then the Scheme has to be approved by the High Court.
All 650,000 current and previous Amigo customers are potential “redress creditors” because they may have a valid affordability complaint. Potentially both borrowers and guarantors can complain so they will all be given a vote in the Scheme.
Legally a Scheme doesn’t have to be approved by the FCA. But any FCA-authorised firm would want to be sure that the FCA was not unhappy with its proposal.
Instant Cash Loans (the Money Shop) proposed a Scheme to limit payouts to affordability complaints in 2019:
- ICL had already ceased trading and would be dissolved whether or not the Scheme was approved;
- when ICL proposed the Scheme, it said customers would get about 80% of their assessed compensation. Pigs might fly, I commented…
- later the projection dropped to 14p in the pound, then 10p, and it is now expected to be about 4.1p in the pound;
- all ICL previous customers were emailed in August 2019 and asked to vote on the scheme;
- the Scheme came into effect in October 2019 then six months were allowed for all customers to submit complaints;
- payouts will eventually be made in 2021.
A lot of questions
Questions for Amigo
(1) Complaint numbers and redress amounts
Amigo needs to give these numbers as they are essential metrics for assessing the Scheme proposal:
- How many new complaints arrive each month and how many complaints are at the Financial Ombudsman (FOS)?
- What is the average redress paid?
- What is the value of outstanding loans?
- How many customers has Amigo had? Update – Amigo says it has had 650,000 customers – 150,000 of these have a current loan.
(2) Determining complaints
There could potentially be hundreds of thousands of complaints so an automated process for determining complaints will be required. It should try to make broadly similar decisions to those FOS would. FOS agrees with the customer in more than 80% of Amigo complaints, including many single loan complaints where all payments had been made on time.
- Does Amigo expect the Scheme to uphold more than 80% of claims?
- How will the Scheme assess claims? Amigo’s own records are not sufficient as FOS often finds Amigo did not verify income and expenses.
- Will the Scheme make a deduction for “unpaid interest” when not all loans are upheld? FOS does not do this.
(3) Should borrowers and guarantors all be in a single class for voting?
- How will Amigo assess refunds where a guarantor has made payments?
- There are potential conflicts of interest between the guarantor and the borrower, so should they be treated as separate classes for the voting?
- Is a single class for all borrowers fair? Borrowers with a current balance will get a lot more back from the Scheme through the right of set-off than borrowers whose loans have been repaid.
(4) CCJs, charging orders and debts sold
If a complaint is upheld at FOS, Amigo has to arrange for any CCJ to be set aside and any charging order removed. If the debt has been sold Amigo has to arrange for payments made to a debt collector to be taken into account. Lack of clarity about sold debts has resulted in many customers feeling unhappy about the ICL Scheme.
- What is Amigo proposing to do?
- How many of CCJs, charging orders and sold debts are there?
(5) How much money is being put into the Scheme?
There needs to be clarity about the money being put into the scheme.
- how much of the provision in the half year accounts has already been used?
- is most of the remaining provision in the accounts expected to be needed for write-offs for customers with balances?
- how much cash will Amigo be left with after ring-fencing the money from the Scheme?
(6) What p in the £ will customers get?
This has to be an estimate but it has to be realistic. The original projections by ICL of an 80% return were highly misleading and ICL should have known that at the time.
UPDATE – I have done a long article exploring this question in more detail: Amigo Scheme – the numbers don’t look good. It concluded that people with a current balance may be OK but everyone with settled loans may get 6p in the £ or less.
Will the FCA agree to this going ahead?
Why would the FCA agree to a Scheme that lets an authorised firm pay customers less compensation than they should get? This is the fundamental question for the FCA.
If the FCA approves this, won’t every other lender think this sounds like a Cunning Plan? The FCA has previously not approved requests for a Scheme from large payday lenders who wanted to carry on lending.
There are other questions too.
How can the FCA agree to a DISP waiver? This seems highly unfair to customers who have already complained – the Scheme may not go ahead so why should their complaints be delayed?
Legally it isn’t the FCA’s role to decide if a Scheme is fair to creditors. However the FCA may feel it has to consider this as many customers may be vulnerable and lack the financial background to understand what they are being asked to agree to. So:
- should the bondholders be left whole? Would not some form of debt for equity swap provide more money for redress payments?
- the proposal that 5% of Amigo profits in the next three years should be added to the money for distribution seems insulting. Why should Amigo shareholders be able to profit from the new lending while old customers take all the pain in the Scheme?
What does this mean for customers?
We don’t know the details of Scheme yet. Nor do we know if the FCA will allow it to proceed.
Until we know a lot more, it’s impossible to say if customers should vote to approve this.
But many people will be worried that Amigo will be “Judge and Jury” in a Scheme, with no right to take an appeal to the ombudsman. And they may think it is unfair that they won’t be repaid in full if Amigo wants to be able to continue as a lender.
This Scheme may not go ahead, so I suggest that all Amigo borrowers and guarantors think about complaining now if repaying an Amigo loan caused them problems. The following articles have template letters you can use: