Amigo Loans is no friend of the FCA: The regulator investigates Amigo’s assessment criteria

June 21, 2020

2 min read

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What's going on here?

UK financial markets regulator, the Financial Conduct Authority (FCA), has launched an investigation into whether sub-prime lender Amigo Loans is conducting appropriate creditworthiness assessments.

What does this mean?

Amigo is the UK’s largest provider of guarantor loans. This means individuals who might otherwise struggle to borrow money can use friends and family to guarantee loan repayments (at an eye-watering 49.9% APR).

The guarantor lending sector has boomed in recent years with the demise of alternatives (such as payday lenders), but the FCA has been critical of the industry. Targeting Amigo, the FCA stated that the company’s business share which comes from repeat lenders (38%) leads to customers getting caught in a cycle of high-interest debt. 

To pre-empt regulation, in 2019, Amigo altered its business model from the practice of re-lending to existing borrowers to targeting new customers (aiming to reduce their re-lending customer base to 20%). This has slowed Amigo’s lending growth and increased advertising costs, which played a key part in the company’s shares falling 93% in the last twelve months. Clearly, this investigation comes at a challenging time.

What's the big picture effect?

The lending industry has been subject to tightening regulation in recent years due to concerns over the proportion of guarantors covering defaulted loans increasing. In fact, a 2015 Citizens Advice report found that 25% of guarantors did not understand the extent of their liability. 

This report ultimately led to the FCA introducing new rules in November 2018 which sought to clarify expectations around firms’ assessments of customers, emphasising a customer’s affordability risk, not just their credit risk. But this more thorough standard likely requires greater resources, potentially reducing lenders’ profitability. This could be why, according to former chairman and founder, James Benamor, Amigo was issuing loans in a “wholly irresponsible manner”. This was refuted by Amigo, and Benamor’s statement could have simply been his justification for attempting to replace the board with his own preferred candidates (leading to Amigo filing for a high court injunction). 

A challenge for the sector is that relying on a customer’s recent financial history (typically 30-90 days) is no longer indicative of the customer’s actual financial position in the COVID-19 context. This has led to some firms (including Amigo) suspending new lending. Although this will certainly impact companies’ revenues, undertaking appropriate affordability checks is vital to quell the already rising number of customer complaints (which the Financial Ombudsman Service finds in favour of the consumer 89% of the time). An influx of compensation claims ultimately led to the collapse of payday firms such as Wonga, CashEuroNet and The Money Shop (to read more about payday companies’ challenges, click here).  

With tightening regulations, internal conflict and rising customer complaints, Amigo had been considering turning over a new leaf with a sale. But an offer valuing Amigo at £99.3m has now been withdrawn by the unnamed party as a consequence of the FCA investigation. Although there might be other interested suitors, this could cause more problems than it solves, as any sale requires the approval of majority shareholders Richmond Group (61%), owned by Benamor.

Report written by Keir Galloway Throssell

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