On 25 January 2021 Amigo announced that it is proceeding with the next stage of its proposed Scheme of Arrangement and published the formal Practice Statement Letter (PSL) that describes the Scheme for the customers affected.
I have summarised the proposal in Amigo’s Scheme (1) timetable for approval & how it may work.
This article is a follow-up, looking at seven points of concern about the Scheme. A common theme running through these is the lack of specifics about how exactly it might work.
Without a lot more details, it is hard to imagine how the Financial Conduct Authority (FCA) could agree to the Scheme proceeding. And it is very hard to see how customers would have enough information about the Scheme to be able to vote on it, even if it gets through the first court hearing at the end of March.
1) The FCA has not agreed to the Scheme
A Scheme has to be approved by the people affected – that is the customers – and the Court. Technically the FCA doesn’t have to approve it, but as an authorised lender, Amigo needs the FCA to be happy, which is why Amigo originally asked it for a “letter of non objection“.
This is not a formality. Wageday Advance and QuickQuid proposed Schemes that would let them carry on lending. Like Amigo they will have pointed out that customers would get more redress in a Scheme than in administration. Like Amigo they asked for a letter of non objection from the FCA – they did not get it and went into administration.
The FCA look at the effect on customers but it will also be concerned about the broader market:
- will Amigo uphold complaints in the scheme in the same way that the Financial Ombudsman does? If not, what signal does that send to other lenders? Will it make other lenders more inclined to ignore FOS decisions and to hope they may not have to pay FOS fees?
- the anti-competitive effect on the other lenders – why should they have to pay refunds in full if Amigo gets away with very little? How many other lenders will ask for a Scheme if Amigo gets one?
Now the PSL says:
[Amigo] has issued this PSL without the support of the FCA, which has not completed its assessment of the Scheme and its underlying methodology for assessing claims.
This isn’t some minor hiccup. I think Amigo was expecting to receive the go-ahead from the FCA. Without it, Amigo seems to be pretending it doesn’t really need it by withdrawing its request for the letter.
But if the FCA doesn’t understand enough about what Amigo is suggesting to agree with it, how can customers vote on this?
2) The customers are the only losers in the Scheme
The customers are the only group which loses in this Scheme. In administration unsecured bondholders would not be repaid in full and the shareholders would receive nothing. So it is fundamentally inequitable that only customers should suffer in the Scheme.
A fairer Scheme could be set up in other ways eg:
- a debt for equity swap would allow Amigo to put more cash into the pot for customer redress, with the money coming from the bondholders;
- a placement or rights issue would raise money from shareholders to go into the pot for customers.
But the PSL presents the current proposal as a binary choice, saying “If the Scheme is not approved, Amigo will likely go into insolvency“. Aimed at a financially unsophisticated set of customers, I think this is misleading – there are other ways to structure this Scheme.
3) How will Amigo calculate redress?
(a) Which loans are upheld?
As the PSL says: “the underlying methodology for determining claims is a critical component of the Scheme“. But it says nothing about how this would be done or even what Amigo is aiming for in drawing up the methodology.
Amigo could have said it accepts the general approach that FOS takes to determining affordability complaints and that is looking to implement decision-making that will result in a similar uphold rate for Claims in the Scheme.
But without that reassurance, how can a customer guess if a Claim from them would be upheld? Amigo has a long history of making poor decisions on complaints.
Amigo faces the problem that its own records do not appear sufficient to make proper affordability assessments because it did not verify income and expenses. Most simple metrics such as “accept top-ups but not the first loan” or “check if any payments were missed” – will not be helpful in many cases as FOS is frequently upholding single loan cases where all the payments were made on time.
The process needs to be consistent and reliable. It must also be largely automated (at least for the affordability complaints) or there is going to be no chance of Amigo processing 100-200,000 claims in a reasonable timescale. So it can’t be based on people looking at customer bank statements and drawing up new income and expenditures.
Underlying the scepticism here is the fact that Amigo will benefit if it turns down as many complaints about open loans as possible. If Amigo gives fewer balance reductions than it has provisioned for, it will put 39p of every pound saved into the pot for paying other customer refunds – but it keeps the other 61p.
(b) what is the redress on those loans?
Normally the redress calculation is simple once it has been decided what loans were unaffordable.
But Amigo has made this complicated in two ways. First it has been adding a deduction “for unpaid interest” which FOS never does. This has cost some customers hundreds or thousands of pounds. The PSL says “The Scheme will replicate the current redress regime of Amigo” so that sounds as though Amigo intends to continue with this unfair practice.
Amigo is also proposing to give a guarantor full redress for the payments they made and take that money from the borrower’s account (I am simplifying here). It has said that it will not allow the borrower to owe more than they did before the complaint. But there will still be borrowers who have already repaid their guarantor who will get very little redress because of this.
4) Is the Scheme in the interest of customers who have a valid complaint?
If the Scheme is not approved, Amigo will likely go into insolvency, and based on our calculations, no compensation would be paid to customers. Based on our calculations, customers will be better off if: (i) they vote for the Scheme; and (ii) the Scheme is approved by the creditors and the Court, because they will receive some compensation for their valid claims.
Which sounds so clear cut… but it doesn’t mention that many people with a current loan will gain nothing from a Scheme as they would have the right of set-off in insolvency too. Indeed they may get more from insolvency if they have more loans upheld in administration than in a Scheme or the redress calculated is higher.
In addition, tens of thousands of current customers making payments would be better off if Amigo went into administration now rather than into a Scheme in several months time. This is why the FCA should be looking to make a decision as soon as possible.
5) No indication of possible customer redress
I think the PSL should have made some attempt, however rough, at estimating what percentage people might be likely to get back.
I made some estimates in Amigo – the numbers don’t look good. They were very crude because so I had to estimate so many numbers.
But Amigo knows a lot of the numbers involved: what the average balance reduction is in a complaint, what the average cash refund is, what uphold rate it expects, how many guarantors have made payments, how many people have had top-ups loans, how many people have missed payments, how many people will have great difficulty in making a claim because Amigo has wiped data about old loans etc etc.
Amigo could therefore do much better calculations. One of the big unknowns is how many people will make a claim. But Amigo could guess at a range and use this to estimate the likely “pence in the pound” payout.
Why isn’t Amigo doing this? Perhaps it would show that Amigo expects to uphold a lot fewer complaints than FOS does … or the calculation may be so tiny people will be horrified?
Amigo has so far refused to give the detailed numbers that would help with this sort of calculation. Investors who have previously asked for average redress amounts and uphold rates were told the numbers are “commercially sensitive” so they won’t be published.
I don’t think Amigo can hide behind this screen of secrecy. It is proposing to pay customers a lot less than their correct compensation so it needs to be entirely open about what it is doing.
6) Amigo does not have a DISP waiver
In December Amigo asked for a DISP waiver from the FCA because it wanted to suspend complaint handling. It didn’t want to have to to pay out on new FOS decisions and wanted to stop issuing decisions to customers making a complaint.
In the announcement on 25 January, Amigo said it had withdrawn its DISP waiver application. This sounds like the letter of non objection situation, with Amigo now trying to pretend it didn’t need a DISP waiver.
But if it doesn’t have a DISP waiver, how can it not payout on new Final Decisions from FOS, which are legally binding? This is baffling – how can FOS and the FCA be happy with this? And the Ombudsman seems to be continuing to work on Amigo cases, see Update: Information for Amigo customers.
This is not what has happened in the run-up to other Schemes – ICL continued to settle complaints until the Scheme was approved.
7) Which complaints will go into the Scheme?
There are two sorts of problems here. First the inclusions and exclusions that Amigo is proposing. And secondly making sure that the PSL describes these in clear and helpful terms to customers. How can someone be asked to vote if they are not clear whether a complaint by them would form part of the Scheme?
There is no plain English description of an affordability complaint in the PSL. Many customers will assume incorrectly that if they have made all the payments on time so far the loan is “affordable” so they cannot claim.
The PSL says all complaints about loans that have been issued by Amigo, current and previous, will be included in the Scheme. But customers may be unaware of the range of issues they may have good cause to complain about. Amigo, which wants to restrict the time to complain and the right to go to FOS, needs to provide clear information about possible complaints so customers have more information. Among the possible reasons to complain are:
- a guarantor was pressured into agreeing to the loan by the borrower;
- the loan was not explained properly to the guarantor;
- Amigo unfairly added a large amount of interest to the contract when the first payment date was moved a few weeks. Borrowers were not told at the time about how much this would be nor how they could reduce by making earlier payments;
- Amigo did not treat vulnerable customers fairly during its collection process;
- Amigo did not give a Covid-19 payment deferral when it should have;
- Amigo did not fairly assess a customer’s circumstances after a Covid-19 payment deferral when it should have provided tailored support;
- Amigo made errors in credit reporting.
It will not be possible to make any complaints about these loans after the six month period for Claims in the Scheme has ended. But some of the existing loans extend for years. How can Amigo bar future complaints about a problem which has not yet happened?
The PSL lists some exceptions where a claim cannot be made:
- 27a bars already settled complaints – but Amigo may have made an unfair offer and used misleading words so the customer thought they would not win a case at FOS eg time-barred loans and deductions “for unpaid interest”. This seems unreasonable – a better approach which is common in administration is to let a customer make a claim and any previous redress is deducted from the new assessment.
- I have no idea what 27b is intended to bar or why. It needs to be better worded.
Making a sweeping assertion that customers will be better off in the Scheme may not turn out to be accurate when there is a clear description of how Amigo will decide whether to uphold claims in the Scheme.
Amigo needs to be much more forthcoming about what it is proposing. Without this, customers can have little idea what they will be expected to vote on.
And the fundamental unfairness of a Scheme that only affects customers, not bondholders or shareholders, needs to be rectified.