FCA urged to act as lender bids to cap payouts to poorest borrowers

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Consumer campaigners are urging the government and the City regulator to intervene in a rescue scheme proposed by the sub-prime lender Amigo, saying it could enrich the firm’s directors while some of Britain’s poorest borrowers miss out on up to £1bn in compensation.

They have called on the Financial Conduct Authority (FCA) to block plans to limit redress payments to nearly a million current and former customers who were potentially mis-sold unaffordable loans by Amigo, which is the most complained about financial lender in the UK.

Consumers who lodge successful complaints to the financial ombudsman typically receive payouts that leave them in the same financial position as if they had not received the loan. That usually means a 100% refund of the interest on the loan, plus an additional rate of interest on those charges.

Amigo, however, has asked the courts to approve a “scheme of arrangement” that would cap the amount it paid out to consumers. Its own examples suggest payouts could be worth anywhere between 10% and 23% of the total value of the loan, but refunds could be much lower depending on how many customers lodge successful claims.

The company argues it will collapse into administration if the scheme is blocked.

The potential risk for consumers is growing as other high-cost lenders follow suit. The consumer credit division of Provident Financial said on Monday that it would go to court to ask for a similar deal to the one Amigo has proposed, allowing it to cap compensation at £50m.

The founder of MoneySavingExpert, Martin Lewis, said the regulator needed to use its powers and stand up for consumers. “I would call on the FCA to intervene, to make sure a fair and proportionate balance of the money available from Amigo for redress is given back to customers, who have often had their lives made very difficult by being mis-sold hideous, over-expensive loans.”

Critics have also hit out at the route plotted by Amigo’s directors, which hands them stock options that could be worth millions of pounds if the company’s share price jumps as expected assuming the deal is approved.

Five Amigo executives would receive long-term bonuses that combined would be worth at least £7.3m if the share price hits the target price of 40p per share in three years’ time and stays at that level until the time the awards are paid at the five-year mark:

• CEO Gary Jennison: 9.5m shares (£3.8m at 40p)

• Chief financial officer Mike Corcoran: 4.75m shares (£1.9m at 40p)

• Chief risk officer Paul Dyer: 1.5m shares (£600,000 at 40p)

• Chief transformation officer Shaminder Rai: 1.5m shares (£600,000 at 40p)

• Chief restructuring officer Nicholas Beal: 1m shares (£400,000 at 40p)

Amigo shares are now worth 11.6p, 96% below their IPO price of 275p.

The Labour MP Stella Creasy said that if they allowed the deal to go through, the government and regulators would be “setting a precedent that it is OK for a company to go bust and not repay consumers, but make sure that it looks after its shareholders and bondholders”.

“That’s the wrong way around when the reason they are going bust is because their business model is about exploiting consumers,” she said, stressing that the government needed to intervene urgently.

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Amigo is the UK’s largest provider of guarantor loans, which use friends and family to guarantee repayments on loans to people who might otherwise struggle to borrow. Its loans typically come at a rate of about 49.9% APR, and are repaid over a number of years.

Concerns have grown that a new breed of lender offering high-interest loans has stepped into the gap left by Wonga, the payday lender that collapsed in 2018 under a welter of compensation claims.

QuickQuid and Peachy are among several subprime lenders that have also collapsed in the last two years, leaving thousands of customers without recourse to full compensation over claims they were mis-sold loans they were unable to afford.

Amigo will go to court in a fortnight in an attempt to persuade a judge that it should be allowed to continue as a regulated lender with its compensation liabilities capped at £35m, plus a 15% portion of profits over the next four years, despite being weighed down by compensation claims that its founder, James Benamor, has suggested could be worth up to £1bn. Amigo is also proposing to reduce balances for claimants that still have not paid back their loans.

More conservative estimates, which assume roughly 20% of former customers lodge claims as part of the scheme, could still result in the bill reaching £400m, according to the author of the Debt Camel blog, Sara Williams.

Amigo said it did not see “any likely scenario” in which the potential level of claims could reach £1bn, but declined to share its own estimates. “We do not recognise any of the estimates of compensation liabilities made by third parties, which could only be based on speculation and risk misleading our customers,” Jennison said.

The Guardian understands the FCA is preparing to tell the court it has reservations about the scheme, but it is unclear whether the regulator will make a submission to the court suggesting the deal be scrapped.

The FCA could also inform the judge that should the scheme of arrangement be agreed, it is prepared to continue as its supervisory watchdog.

It has stressed that its powers are limited and that it cannot unilaterally block the scheme as it heads to court. It could, however, make a public declaration condemning the scheme, or provide more detailed information to customers about their options.

Mick McAteer, a former FCA board member who now runs the Financial Inclusion Centre, said the FCA “needs to remember it is there to fight to protect consumers – especially vulnerable consumers like this”.

Jennison said the scheme was “absolutely” fair for borrowers. “We need to understand there is not a bottomless cash cow here,” he said.

He also backed the bonus payouts for executives, saying it was difficult to recruit people without offering incentives that were linked to the company’s performance. “If we do get that level of payout, it will be because the business has performed well, and that will then be aligned with paying customers out more,” he said.

Williams said borrowers were making the largest sacrifice. “This is not a simple ‘vote for this or you will get nothing’ situation. That is a misleading way to frame it.

“There are other ways a scheme could be set up. For example, with a debt for equity swap, the bondholders would make a financial contribution to the money available for refunds. But that is not being explained to the customers,” she said.

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Amigo said all other options had been considered and that it was fantasy to suggest customers would receive compensation in any way other than the scheme of arrangement. “There is no prospect of bondholders financing a compensation fund. As we have made clear, if the scheme fails Amigo faces administration,” Jennison said.

“Amigo’s customers participating in the scheme will benefit from 15% of profits each year for the next four years, which is unprecedented for a legal process like this.”

The FCA and the Treasury declined to comment.