Adios AMIGO: Sub-prime lender listed for sale

February 17, 2020

2 min read

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What's going on here?

Sub-prime lender Amigo has weathered a rocky couple of months, with share prices plummeting 82% following the Financial Ombudsman Service’s increased scrutiny into the lender’s practices. Discussions for the potential sale of Amigo are now underway, but as yet there are no suitors.

What does this mean?

Amigo enables those with poor credit rating to borrow money, using family and friends as guarantors in case of non-payment. However, following a barrage of complaints brought to the Financial Ombudsman Service (FOS), the watchdog has found that Amigo ran insufficient credit checks, lending money to individuals who could not afford repayments. Accusations abound that the company implemented “pilot schemes” to grow its loan book (a record of its lending) to attract investment for its IPO. The company floated in June 2018 with a market capitalisation of approximately £1.31bn, immediately qualifying it to enter the FTSE 250. 

Since the IPO, Amigo has attempted to remodel its business to counteract regulatory scrutiny, notably decreasing the number of “pilot loans”. The changes sought to comply with FCA rules as well as expanding its customer base, moving away from relying on repeat customers. However, between the FOS crackdown and boardroom turbulence, share prices have tanked 82%, making Amigo London’s worst performing initial public offering in more than three years.

The Richmond Group, which owns a 60.6% stake in the company has announced its interest to sell the business following this remarkable fall from grace. Amigo is currently conducting a strategic review with the help of RBC Capital Markets.

What's the big picture effect?

This story raises some key questions regarding the short-term loan industry. Critics are sceptical as to how successfully regulators are maintaining the delicate balance between regulation and access to credit for those with a poor credit history. The FOS has been accused of forcing Wonga and Quickquid out of business by aggressively interpreting FCA rules (to see our article on that, click here).

Following numerous complaints, Wonga went into administration in 2015, after the FCA placed a cap on the amount of interest the payday lender could charge. The new cap reduced the interest charged to no more than 100% of the loan, whereas Wonga had been charging a staggering 5,853% per year (APR). Wonga’s demise was triggered by a mass of FOS complaints which means it is possible that Amigo may go the same way

Charities such as Citizens Advice are speaking out against guarantor lending, claiming that many guarantors are unaware that they risk ending up in debt themselves. In a review of Amigo’s practices, the FCA announced that the lender needs to become more transparent, particularly regarding the risks faced by guarantors. 

It remains to be seen whether Amigo will withstand the growing number of complaints and whether changes to its business model will bring it back from the brink of ruin.

Report written by Emily Noble

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