The legal framework
A Scheme is an arrangement under Part 26 of the Companies Act that allows a firm to vary the rights of some or all of its creditors and/or shareholders.
Creditors have to vote to approve the Scheme and it has to be sanctioned by the Court, see Practice Statement (Companies: Schemes of Arrangement under Part 26 and Part 26A of the Companies Act 2006).
A Scheme is set up as follows:
- The firm issues a Practice Statement Letter describing the Scheme and a longer document known as the Explanatory Statement.
- A first court hearing – called the Convening Hearing – gives approval for creditors to be divided into classes to vote to approve the Scheme.
- Creditors will be told how they can vote on the Scheme. A meeting will be arranged for each class and there may be provisions to vote online. The creditors in each class have to vote to approve the Scheme which must be passed by 50% by number and 75% by value of the creditors in that class.
- A second court hearing – called the Sanction Hearing – is held after the creditors have voted.
Capping affordability refunds and the FCA
In 2018 and 2019, several payday lenders proposed Schemes in order to cap the amount of money they would have to pay out to customers who had an affordability complaint.
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.
For a lender to carry on trading after restricting refunds to former customers could be seen as being anti-competitive. See Amigo’s Scheme – who’s next? Implications for the bad credit market where I look at this issue.
The FCA also needs to be happy that the Scheme proposed is fair for customers and that customers have been properly informed about it. In a statement after the Amigo hearing (see below) the FCA said:
We have significant concerns about Schemes of Arrangement being used by firms to unfairly avoid paying customers redress.
ICL’s Scheme – nearing completion
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;
- the payout level was determined to be 4.31% and payments started to be made in May 2021.
Comment – the ICL Scheme did not raise issues about competition or customer fairness as the company was going into liquidation. It was a technical device that increases the amount customers would receive from what they would get in administration.
Amigo’s proposed Scheme – rejected by the court
In December 2020 Amigo proposed a Scheme to cap affordability refunds to customers:
- Amigo’s Practice Statement Letter.
- The convening hearing on 30 March 2021 approved the voting arrangements for the Scheme.
- About 95% of the customer votes were in favour of the Scheme.
- Customers voted in favor of the Scheme by about 95%
- The week before the Sanctioning hearing on 19 May, the FCA informed Amigo it would appear in court to oppose the Scheme
- On 24 May the court accepted the FCA’s arguments and rejected the Scheme.
- Amigo is currently considering its options.
See Amigo’s Scheme for articles looking at this Scheme in detail.
Provident’s proposed Scheme – being voted on
In March 2021 Provident proposed a Scheme to cap affordability refunds to Provident home credit and Satsuma payday loan customers:
- Provident’s Practice Statement Letter.
- The convening hearing on 22 April 2021 approved the voting arrangements for the Scheme and voting started on 17 May.
- The Sanctioning Hearing is set for 30 June
See Provident’s Scheme for articles looking at this Scheme in detail.