Indigo Michael Limited (IML) went into administration on 9 January 2023. It had two lending brands – SafetyNet Credit (SNC) and the much smaller Tappily. In this article, I just talk about SNC but this all applies to Tappily too.
I’ll start with the background – how SNC lending worked; why they have been losing so many cases at the Financial Ombudsman (FOS); and the recent restrictions that the Financial Conduct Authority (FCA), SNC’s regulator, has imposed.
Then I’ll look at what normally happens in a payday lender administration and whether SNC’s may be different.
How SafetyNet Credit lending worked
“Rolling credit” and the payday loan trap
SNC gave borrowers a credit limit, a bit like a credit card. This is called “rolling credit”. If you have a limit of £500, withdraw £400 then repay it, you can immediately take out up to £500 again.
Where SNC is totally unlike a credit card is that they choose the repayment they will take from your bank account, after checking how much is in your account using Open Banking.
Although there was a minimum payment set, SNC frequently took much more. It said this was to minimise the interest someone paid. Often this left the borrower with so little money that they had to borrow again from SNC. That is the classic payday loan trap.
SafetyNet Credit’s quoted APR was misleading
SafetyNet Credit’s website said:
interest is charged at 0.8% per day only on any amounts you borrow, capped at 40 days. No extra costs, no hidden charges.
Now 0.8% per day interest rate is the maximum rate payday lenders can legally charge. And they quote APRs of 900% or more… But SNC quoted a representative rate of only 68.7% APR.
It seems that in calculating that APR, SNC assumed that the borrowing is repaid within 40 days and that no more was borrowed. But that wasn’t what happened and it isn’t the way a rolling credit facility is expected to work.
The true cost
In this FOS case, Mr P borrowed £37,000 and repaid £41,000 over a period of three years. SNC told the Ombudsman this was cheap borrowing. But as the Ombudsman said:
I think it’s somewhat misleading to use a figure of £37,000 in any interest comparison as Mr P never had access to £37,000 from SNC. He only ever had access to a maximum of £800.
The Ombudsman’s conclusion was:
SNC collecting Mr P’s payments in the way that it did meant that Mr P paid a high amount of interest for access to a relatively small amount of funds… in reality the amount of interest paid in proportion to the funds Mr P had available is very similar to interest payable on a high-cost short-term credit product [the regulator’s term for a payday loan].
Debt Hacker estimated the true interest rate in Mr P’s case at 942%. Just like a payday lender.
Why SNC has failed
The administrators will give their summary in a few weeks, but at the moment SNC seems to have had three interlinked problems.
1) Losing a lot of affordability complaints
Affordability complaints against SNC were some of the easiest complaints to win:
- SNC could see what was in your bank account so it should have known you were in difficulty;
- repeat borrowing most months suggests that you are not using the facility for a one-off need, but have become dependent on it.
Many cases were settled directly by SNC when people complained. And 75% of the complaints sent to FOS were won in the first half of 2022.
To stem this tide, SNC tried to make it hard for a customer to use a claims management company. FOS dismissed SNC’s excuses for rejecting or ignoring CMC complaints, with the following wording being used in several cases:
I’m not persuaded there is any reason why the Financial Ombudsman can’t consider this complaint. It is disappointing that SNC has taken the stance that it has in relation to this particular jurisdiction issue considering that, in my view, it is patently incorrect and is therefore simply delaying the resolution of this complaint.
2) Restrictions from the FCA
In July 2022, the FCA brought in restrictions on Indigo Michael (IML) affecting the amount it took as repayments and its attempts to halt CMC complaints. After some immediate changes it restarted lending but by mid-September it stopped lending to new borrowers.
In late 2022 new FCA restrictions were imposed. These include:
IML must not use a CPA to take repayments from any existing customers where IML has reason to believe there are insufficient funds in the account, or that taking payment would leave insufficient funds for priority debts or other essential living expenses, leading to the customer borrowing further from IML or another firm, or entering their overdraft facility to meet such expenses.
Before taking on new customers or offering credit limit increases to existing customers, IML must, when conducting its creditworthiness assessment assume that repayment of the full capital balance plus interest will be collected, without the customer having to borrow to meet repayments.
3) A funding problem
IML’s last published accounts showed a debt of £50 million to its parent company, Account Technologies Ltd, that didn’t have to be repaid until at least January 2023.
With the additional FCA restrictions the business may no longer be profitable. And increasing numbers of complaints have been made after the FCA stopped SNC rejecting claims company cases – there must be several thousand claims outstanding now at SNC or with FOS.
If the parent company doesn’t see a future for IML and now wants its loan back, that may have dictated the timing of the administration.
What normally happens in a lender administration
I’ve written quite a few of these “payday lender fails” articles over the last few years – and Safetynet Credit was effectively a payday lender. Most have followed a similar pattern:
- lending stops;
- administrators halt any refunds which are in the process of being paid – customers owed refunds have become unsecured creditors and it won’t be known for some time how much cash there will be to pay out, if any;
- existing complaints are put on hold. New complaints arriving are put on hold. FOS returns outstanding cases to the administrators to settle – FOS has to do this in an administration, it doesn’t legally have a choice. . The administrators develop a means of deciding whether to uphold complaints or not;
- unsecured creditors are only paid a percentage of any cash refund and that after a year or more. This has varied from 50%+ to nothing.
- people with a complaint and an outstanding loan will first get a reduction / write off of the balance. This happens in full, then if there is any remaining refund to be paid in cash, they are paid a percentage of that;
- outstanding loans after any balance reductions are usually sold to a debt collector.
What will happen in the SNC administration
Some lending continues… for 5 months
Unlike most lender administrations, the FCA has agreed to the administrators carrying on some lending:
- there won’t be any loans to new customers;
- no loans to customers who have a current balance but haven’t borrowed from it in the last 30 days;
- a customer who has borrowed in the last 30 days can borrow again but has had their credit limit reduced to the amount they borrowed;
- SNC has emailed affected customers telling them what their credit limit has been reduced to and warning that credit limits are likely to be reduced further in the future.
The Statement of Administrator’s Proposal published on 10 March 2023 say that lending is being wound down over a period of five months.
There may be no money for cash refunds
This is because repaying the very large secured loan takes priority over paying unsecured creditors, which includes customers owed refunds.
The administrators initially warned that “there is very little prospect of recoveries for unsecured creditors“.
This means they do not expect to pay any cash refunds. This includes cases where a refund has already been offered by SNC or agreed via the Ombudsman as well as any new complaints that are made.
The Statement of Administrator’s Proposal says the only money available for cash refunds would be small and the amount may be less than the cost of assessing the claims.
What should previous customers do?
At the moment, probably nothing. As it seems very unlikely there will be any money to pay cash refunds, there is no point at the moment in submitting a complaint if you haven’t already done so.
If you have already made a complaint, then there is likely to be nothing you can do to progress it. If your complaint is already with FOS, they have put up a notice saying what will happen – basically FOS won’t be taking any new complaints and will be returning existing complaints to the administrators.
What should you do if you currently have a loan from SNC?
This debt still legally exists, the administration doesn’t change that.
You should expect to see your credit limit being reduced over the next few months. I am guessing but this may be quite quick. As your credit limit is being reduced, repaying this debt will not be helping to improve your credit score much as you will be using all or almost all of the credit limit.
If you already have made an affordability complaint then it is sensible to assume that the maximum you may get is for your debt to be cleared.
You have to decide whether to carry on making payments:
- if you carry on, then this probably reduces any compensation for unaffordable lending you will get, down to zero if you clear the balance;
- if you stop paying until your complaint is decided, then this will harm your credit record, although negative marks should be removed if you win your complaint.
If you cannot afford to repay this balance without borrowing more elsewhere or getting behind with bills, talk to National Debtline on 0808 808 4000 about your options. It may be better to default on this SNC loan, where no interest is added after 40 days, rather than borrow elsewhere at a high rate of interest.
People are asking in the comments below how to stop paying:
- phone your bank and cancel the Continuous Payment Authority (CPA) that Indigo Michael, SNC or Tappliy has over your bank account. You have to phone up, this can’t be done online;
- also send in a complaint if you haven’t already done this. This can be short. Just email complaints@Safetynetmail.co.uk and say the lending was unaffordable and you will not be making any further payments until your complaint is decided by the administrators.
Another regulatory failure
Before the administration Sky News said that SNC may be about to fail, describing it as the latest victim of an FCA clampdown on high-cost credit providers.
But it seems to me that the customers are the real victims here. They have suffered from SNC’s lending practices and they have also been let down by the FCA’s failure to supervise SNC effectively:
- the FCA allowed the misleading APR to carry on being advertised;
- it allowed a firm who was losing a large number of complaints to carry on without considering a redress exercise;
- SNC was allowed to trade with a level of capital that was inadequate to settle complaints.