The sub-prime lender Amigo faces potential collapse after confirming that it will not appeal against a high court decision that blocked a scheme to cap customer compensation.
Amigo, which charges 49.9% interest and requires borrowers to provide a friend or family member to act as a guarantor, said it would “consider all options” and was looking at an alternative scheme to manage the costs of a surge in customer compensation claims.
However, crafting a new scheme could be costly and take months to complete, and would still need to be approved by its creditors and the courts.
The lender would also need the support of its regulator, the Financial Conduct Authority, which criticised its first scheme for being unfair to some of the UK’s poorest borrowers.
Amigo, which grew in popularity following the demise of sup-prime rival Wonga in 2018, has been deluged by mis-selling claims by customers who have accused the business of handing out unaffordable loans. But Amigo said it was unable to keep up with the mounting costs of those claims, and was at risk of going under, unless it could cap compensation payouts in a scheme covering nearly a million of its current and former customers.
But last week the high court refused to approve Amigo’s scheme, which could have seen successful complaints receive as little as 5% to 10% of any successful claim, and capped the compensation pool at a maximum £35m and 15% of profits over the next four years.
Executives warned Amigo would be likely to collapse barring a new proposal. “Without a scheme, Amigo faces insolvency as it will be unable to satisfy its customer compensation claims as well as meeting the legally binding funding obligations owed to its secured creditors,” Amigo’s chief executive, Gary Jennison, said.
“The board is committed to finding the best solution it can for Amigo’s customers and other stakeholders and will be working with its stakeholders, including the FCA, to achieve that solution as quickly as it can,” he added.
The looming threat of the company’s insolvency sent shares down 11% on Tuesday morning to 7.3p. Jitters over the company’s future have caused shares to plunge 75% in the past month. Amigo shares have lost 97% of their value since their peak in December 2018.
John Cronin, a financial analyst at the stockbroker Goodbody, expects Amigo to put forward a new proposal that increased the share of its future profits. “Given that this is an option for the board, it is difficult to see why Amigo would opt to go down the insolvency route instead,” he said.
“However, how far Amigo needs to go to secure court and creditor approval for a second scheme is an open question – and the company’s dialogue with the regulator in the coming weeks will inform its decision in this respect,” Cronin added.
Amigo has frozen customer payouts while it considers its options. Debt campaigners warned it would put further strain on vulnerable borrowers who are expected to carry on repaying loans despite lodging a complaint that could see their loan eventually cleared.
“A delay of a few more months will be very painful for Amigo customers with currently unaffordable loans,” Sara Williams, the author of Debt Camel, a blog advising people on money problems, explained.
“The FCA has agreed to Amigo having a moratorium from making refunds. But this moratorium should be two-way, with customers able to stop making repayments if they have a complaint that is currently in limbo, being ignored by Amigo, and not able to be sent to the ombudsman.”
