The City watchdog is under pressure from cross-party MPs to explain why it is allowing the sub-prime lender Amigo to push ahead with a rescue plan that will cap compensation payments for nearly 1 million customers, while giving executives the chance to earn £7m in long-term bonuses.
The shadow City minister, Pat McFadden, and the head of the Conservative-led Treasury committee, Mel Stride, said the Financial Conduct Authority had questions to answer about how it was regulating firms like Amigo, and whether it is was fulfilling its obligation to protect consumers.
The FCA – which has been in charge of regulating high-cost lenders since 2014 – has confirmed it will not intervene in the scheme, which is expected to be approved by a high court judge on Tuesday. The proposal will then be put forward to borrowers for a vote.
McFadden warned that other high-cost lenders may take advantage of the FCA’s lack of action. “If Amigo manages to avoid redress payments through this mechanism, there’s a risk it will set a precedent for other companies in a similar position,” McFadden said. “And of course people will be appalled if ordinary borrowers are short-changed, while those at the top of the company receive large payments.”
The consumer credit division of doorstep lender Provident Financial has already proposed a deal similar to Amigo’s, and other high-cost lenders struggling to keep up with compensation claims could follow suit.
“There have been several recent examples where people have lost out financially from firms supervised by the FCA,” McFadden said. “The FCA needs to look at how it is supervising firms and consider whether the right protections are in place for consumers and investors.”
Concerns over Amigo will add to growing frustrations at the FCA’s failure to prevent other City crises including the collapse of Neil Woodford’s investment fund and the the £236m implosion of London Capital & Finance, which resulted in the regulator being reprimanded by a former appeal court judge for failing to take action in time to protect savers.
Typically, borrowers who have been mis-sold loans they cannot afford are offered a 100% refund of interest paid, plus an additional rate of interest on those charges. Amigo’s loans are worth up to £10,000, are repaid over a number of years, and come with a rate of about 49.9% APR, meaning customers can be owed large payouts.
However, Amigo has been struggling to keep up with the flood of successful claims lodged with the Financial Ombudsman Service (FOS), and so is proposing a scheme that would likely cap compensation at between 10% and 23% of what would otherwise have been owed, if not less. Amigo is also planning to reduce outstanding balances for claimants who still have not paid back their loans.
Customers who borrowed loans before 21 December 2020 will not be able to lodge claims through the FOS if the scheme is approved.
Meanwhile, five of Amigo’s executives have stock options through their long-term bonus scheme that could be worth a combined £7.3m in five years if the company’s share price jumps, as expected, thanks to the deal.
The company argues it could collapse into administration if the scheme is blocked.
Stride said the FCA would face tough questions from MPs if the scheme went ahead. “Any situation where directors might receive bonuses on the basis of a cut in fair and reasonable compensation to consumers would clearly be one of significant concern,” Stride said.
“I have no doubt that the Treasury committee will have questions about this for the FCA when we next see them,” he added.
The regulator has told Amigo it does not support the scheme and is concerned about the way Amigo plans to assess mis-selling claims. It is also opposed to Amigo’s plans to pay significantly less to borrowers who might have received larger payouts by complaining to the FOS.
However, an FCA spokesperson said the decision to approve the scheme rested with the court and borrowers, rather than the regulator. The FCA said it worked “extensively” with firms before court hearings “in order to try and get the fairest outcome for consumers” and would ensure the scheme was operated as intended if approved.
“We appreciate in this case that people feel that they are entitled to full redress. However, the alternative to any scheme of arrangement may be insolvency, which is likely to result in consumers receiving very little or nothing, which we have to be very mindful of,” the FCA spokesperson added.
But Amigo chief executive Gary Jennison stressed that the scheme as the “only real option” for customers hoping to receive cash compensation, and Amigo’s potential collapse would only drive customers to less reputable lenders.
He said the new management team were focused on Amigo’s turnaround and fixing “the problems of the past” by ensuring 15% of profits were dedicated to the scheme over the next four years, on top of a compensation pot worth up to £35m.
“Given it is in their best interests and the real alternative is an insolvency, we strongly encourage our 700,000 past customers and 300,000 present customers to vote for their money and support the scheme,” Jennison added.
