Sub-prime lender Amigo Loans will wind down its business and halt all lending after it failed to raise enough money to fund compensation to customers, the lender said in a statement.
Amigo said that it would not be able to meet the terms of a court order to compensate customers and that its surplus assets will be transferred to creditors of its compensation scheme. Its customers will likely lose out on £15 million that Amigo hoped to raise from private investors.
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According to media reports, at its height, Amigo was valued at £1.4 billion and was making more than a quarter of a billion pounds a year. However, in 2019 its fortunes took a turn after the City regulator began an investigation that led it to conclude that its affordability checks were inadequate, and it found “the proportion of loan repayments that guarantors make has risen considerably, which could indicate that affordability on the part of the borrowers is falling.”
The FCA found the lender had poorly designed IT systems with flaws in its assessment of affordability and creditworthiness.
The lender specialises in providing credit to people who are excluded from mainstream banks.
Background
In mid-February, the City regulator publicly censured Amigo Loans Ltd for failing to conduct adequate affordability checks on borrowers and guarantors.
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By GlobalDataThe Financial Conduct Authority (FCA) said it would have imposed a fine of £72,900,000, however, Amigo demonstrated that this would cause it serious financial hardship. A fine would also have threatened Amigo’s ability to meet its commitments to a High Court-sanctioned scheme, which aims to pay redress to customers.
Between 1 November 2018 and 31 March 2020, Amigo did not have appropriate processes in place to ensure it adequately assessed borrower and guarantor circumstances before approving a loan. Amigo’s failures led to a high risk of consumer harm, both to borrowers and guarantors.
Mark Steward, executive director of enforcement and market oversight at the FCA, said: “Amigo failed to assess properly the affordability of its lending, especially to vulnerable consumers, as our rules required. This led to lending that was unaffordable for some and meant guarantors had to step in. It also had the effect of prioritising the firm’s commercial interests over the obligation to comply with the rules and safeguard customers from unaffordable loans.
“The firm proposed a scheme of arrangement as Amigo could not afford the sizable redress bill in full. Following intervention by the FCA, the scheme was ultimately approved by the creditors, including the affected customers, and by the Court. The scheme aims to ensure an amount of redress is paid to affected customers that is better for customers, in these parlous circumstances, than any other likely outcome.”
Amigo provides guarantor loans aimed at consumers who may be unable to access finance from traditional lenders, due to their circumstances or credit history.
Guarantor lending means the person applying for the loan is required to have another person, typically a family member or friend, guarantee that if the borrower is unable to make a repayment for the loan, the guarantor will make that payment on the borrower’s behalf. Both borrowers and guarantors needed to pass Amigo’s affordability checks for a loan to be approved.
Amigo’s assessment of whether a customer could afford to borrow was inadequate. Amigo’s lending decisions relied heavily on the use of a complex IT system with a high degree of automation. However, design issues and insufficient controls meant that the IT system processed loan applications in circumstances where it was potentially unaffordable for the customer. Although the system raised flags for manual review in some instances, often staff did not sufficiently consider information provided by customers or probe the information they were given before approving a loan.
These issues were made worse by a failure by Amigo to adequately consider regulatory requirements around affordability and act sufficiently on the findings of a number of internal and external reviews, which identified weaknesses in its approach to the assessment of affordability and creditworthiness.
These failings meant there was an increased risk that guarantors would have to step in. The FCA found that 1 in 4 of Amigo’s guarantors was asked to step in and make payments to assist struggling borrowers at some point during the term of the loan.
The FCA investigation also found that Amigo had failed to maintain adequate records of its historic business processes. As a result, on repeated occasions during the investigation, it was unable to provide adequate responses to questions. It also negligently deleted the email accounts of former staff members which hampered the FCA’s investigation.
