‘Dark clouds’ for Amigo Loans amid rising compensation costs and loan defaults

Guarantor loans, where a friend or relative is on the hook if a borrower can't pay, are under intense scrutiny as 90% of affordability complaints are being upheld, writes Ben Chapman

Amigo has been accused of being opaque with how it is dealing with complaints (Amigo)

Problems are mounting for sub-prime lender Amigo, as more borrowers struggle with repayments, complaints pile up and the share price languishes 80 per cent below its peak.

Amigo has been referred to as a “legal loan shark” by MPs and now faces some of the same problems that led to the collapse of payday lender Wonga in 2018, which left hundreds of thousands of consumers with unpaid compensation claims for mis-sold credit.

Amigo, which reported this week that profits had fallen 32 per cent on a year ago, typically lends to borrowers who cannot take out loans from high street banks because of a poor credit rating or other financial circumstances.

It advertises that it can have cash in a customer’s bank account within 2 hours after a five-minute application, even if they have a bad credit history.

Amigo charges lower rates than payday lenders like Wonga - around 50 per cent APR - largely because it requires a friend or family member of the borrower to act as a guarantor, meaning they are on the hook if repayments aren’t made.

Amigo says it "provides a much needed product to its customers who, often through no fault of their own, cannot access credit when their bank says no.”

But reports are proliferating of consumers taking out Amigo loans that they could not afford, leading to greater scrutiny from regulators and a rising bill for compensation.

A surge in compensation payments was the key factor leading to the demise of Wonga and - in October last year - the fellow payday lender QuickQuid.

Before Wonga’s collapse, Amigo was riding high, having just floated on the stockmarket for £1.3bn, netting shareholders a payday of more than £300m

Now, Amigo has set aside £26.6m to deal with affordability complaints, up from £10.4m a few months ago, and analysts fear it is hiding a bigger problem.

Figures released this month show that in the final three months of last year, 90 per cent of affordability complaints about guarantor loans referred to the Financial Ombudsman Service (FOS) were upheld – a higher proportion than for payday loans.

The data is for all guarantor loan providers and aren’t broken down by company but Amigo has 85 per cent of the market.

The number of Amigo customers missing repayments or defaulting on their loans has also risen. In 2016 Amigo set aside 9.5 per cent of its revenues to cover “impairment charges” relating to the cost of bad loans - much lower than many of its competitors.

90%

Affordability complaints about guarantor loans upheld by FOS

Over the last nine months impairments provisions have soared to 31 per cent. In fairness to Amigo, part of the increase comes from an accounting change and money set aside to deal with additional the effects of a no-deal Brexit.

But Amigo’s impairment provision is more than double the level of fellow sub-prime lender Provident Financial, which provides Vanquis credit cards.

Amigo’s senior executive team was ousted in December as founder James Benamor seized back control of the firm he created in 2005. At around the same time as the boardroom overhaul, Amigo began rejecting a much higher proportion of complaints, according to advice website Debt Camel. Amigo has declined requests to reveal how many complaints are now being rejected.

“Amigo has started rejecting almost all complaints in the last few months, including very strong ones that will almost certainly be upheld by the Financial Ombudsman,” said Sara Williams, who runs Debt Camel.

“Many of these customers are in very difficult situations, unable to get help with their debts because they are desperate to try to protect the relative or friend who is their guarantor.“

£11,859

Amount a borrower typically pays back on a £5,000 Amigo loan over five years

In one case reported to Debt Camel, Amigo is said to have granted a loan to a borrower whose guarantor had mild learning difficulties and no income other than benefits.

The repayments amounted to more than half of the person’s monthly household income and the affordability assessment that Amigo was legally required to carry out did not include any costs for clothing, travel, or internet access. Food for the guarantor and her disabled 15-year-old son was budgeted at £60 a month.

Amigo rejected her complaint.

In another complaint rejected by Amigo but upheld by the FOS in October, the Ombudsman found "significant concerns" about the rigour Amigo applied to its affordability assessment.

Rejecting cases where there are clear affordability issues appears to breach rules that say firms must learn from the Ombudsman’s decisions and apply them, says Ms Williams.

“Amigo may be hoping that some customers will just give up or it may be trying to obscure the cost of settling these complaints by dragging them out over an extended period."

But analysts believe there is little chance of that happening and problems are more likely to worsen as borrowers realise they can complain and receive compensation from Amigo if they were mis-sold an unaffordable loan.

Amigo and other guarantor loan providers are under close scrutiny by regulators which has led to increased interest from claims management companies (CMCs), says Gary Greenwood, an investment analyst at Shore Capital.

CMCs recruit customers of financial services companies and complain on their behalf, taking a cut of any compensation.

“The number of complaints about guarantor loans is still relatively low but it’s open season now that the CMCs know it has a problem,” says Greenwood.

49.9%

Typical annual interest rate on an Amigo loan

While Amigo’s balance sheet is relatively strong, its bosses’ refusal to reveal details of how many complaints are coming in is causing concern. “We can’t see from the outside how bad it is. We don’t know the extent of the problem” says Greenwood.

Amigo’s loans have significantly lower interest rate than Wonga’s but are taken out over up to five years meaning the payments can rack up.

Someone borrowing £5,000 over five years would pay back £11,859 at an annual interest rate of around 50 per cent.

Amigo has a responsibility to all of its customers to ensure that they are able to afford their repayments but in some cases it has not done so, according to the FOS.

Amigo relaxed some criteria for approving guarantors in 2016 under its “pilot loans” scheme, although it did not lower affordability requirements. The move helped to boost revenues and the share price but has led to problems, says Greenwood.

“They decided to stretch the envelope and went outside of the normal criteria for assessing customers.

“It looks like that has caused them a lot of pain.”

Daniel Coatsworth, stock market analyst at AJ Bell said there are plenty of signs Amigo will have to radically change the way it lends money if it wants to survive.

"Amigo has given several clues that problems are mounting up.

"Affordability complaints have been bubbling away for some time and the fact it has made provisions in its accounts would suggest Amigo knows it has done something wrong and there is a hefty price to pay in the form of compensation and a tarnished reputation.

“Worryingly it flagged possible increased pressure on the business and ‘a continued evolution’ in the approach of the Financial Ombudsman Service. That suggests Amigo’s past practices are being examined in more detail.

“Should the ombudsman find that the business was particularly poor at running checks to see if customers could manage loan repayments without having to borrow more money, it is fair to say there will be some very dark clouds hanging over Amigo.”

While there are no signs of a Wonga-style collapse at present, if the worst did happen, customers who have complained to Amigo that they were mis-sold loans they couldn’t afford are likely to lose out.

Wonga borrowers were informed by administrators this month that they would get back just 4.3 per cent of the compensation they were due.