£345m Compensation Bill for Mis-sold Loans Could Fell Amigo

Troubled guarantor lender Amigo is warning that the millions it owes in compensation to customers could topple it this year, as it continues to wrangle with regulators over a rescue plan.

Amigo lends to customers whose poor credit histories lock them out of other forms of credit, with family or friends recruited to guarantee the loans. But like other subprime lenders before it, Amigo has faced criticism for charging steep interest rates (up to 49.9%) and failing to properly assess if borrowers could afford the loans. That mis-selling has fuelled a deluge of complaints and claims for compensation.

In the year ending in March 2021, Amigo put aside £345 million to compensate customers mis-sold loans, 193% more than the previous year. That bill, plus the £319 million cost of processing the claims, pushed Amigo to a loss of £284 million.

Amigo paused lending in November as it came to grips with the avalanche of complaints and hasn’t yet resumed it. That mean its loan book contracted by half between June 2020 and June 2021, with revenues falling by a third.

However, recovery in the wider economy meant Amigo collected more on outstanding loans than previously forecast, taking it to a pre-tax profit of £15 million in the spring quarter.

Despite that turnaround, chief financial officer Mike Corcoran said the company is still in an “extremely challenging situation,” with “material uncertainty” about its survival.

Last year Amigo proposed a scheme of arrangement that would limit payouts to claimants to £35 million and 15% of profits over the next five years and, it said, ensure its survival. However, a high court blocked the deal in May following intervention by the Financial Conduct Authority (FCA). The City watchdog argued the settlement would have favoured shareholders over mistreated customers, who would have received just a fraction of what they were owed. Amigo has argued that insolvency would mean those claimants receive nothing.

Since then, the firm has been trying to reach a new agreement that would pass muster with the FCA. “The continued pursuit of a scheme provides a realistic alternative to insolvency,” Amigo said. 

Chief executive Gary Jennison said he was hopeful such a scheme can be found by the end of the year. Speaking to BBC Radio 4’s Today programme on Wednesday, Jennison said his executive team was preparing to reboot the company as “Amigo 2.0,” a lender focused on rehabilitating customer’s financial health, including cutting interest rates if they pay on time and offering annual repayment holidays without penalties.

“We will be a totally different business when we’re allowed to lend again,” Jennison said.

Jennison's bullishness on a deal and the surprise profit nudged shares up nearly 9% to 8.24p by close of business Friday. However, Amigo is still trading at 97% lower than its peak in December 2018.