Longer Reads

Lessons for banks from subprime lender Amigo’s woes

A UK high court decision means that if a bank wants to bind customers into a compensation scheme, it needs to consider what is a ‘fair level’ of compensation.

Originally published in The Banker.

2 minute read

Published 8 July 2021

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  • Banking & financial disputes
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  • Financial services

Banks will need to carefully consider the implications of the UK high court’s May 24 decision to reject a scheme of arrangement proposed by British subprime lender Amigo Loans, on the grounds that the proposed scheme to deal with complaints of mis-selling was not fair.

The Financial Conduct Authority’s (FCA) intervention caused the court to refuse to sanction the scheme, even though it had been approved by the requisite majority of creditors.

This case shows that the FCA will try to prevent a regulated lender from proposing a restructuring scheme that would have the effect of binding customers into a low level of compensation where there is no evidence that the alternative is for the company to imminently collapse.

Amigo provides loans to people who would not be able to borrow from mainstream lenders. The loans are required to be guaranteed by someone with a stronger credit profile.

The company’s problems arose from accusations of unaffordable or unsustainable lending, for which customers are entitled to compensation under FCA rules. It had to make a £150m accounting provision for this and, in response, it proposed a compensation scheme for its customers as a way of restructuring its debts. That formed the basis of a scheme of arrangement which could bind-in its customers. Amigo claimed that the only alternative to the scheme was for the company to go into administration.

The FCA objected that the compensation of 5-10% offered to customers was too low to be fair, in a situation in which the shareholders would lose nothing. It also disputed that the only available alternative was for the company to go into administration. The court agreed, saying that although the scheme had been approved by 95% of those voting at a creditors’ meeting, only about 8% of creditors had attended that meeting. It added that since the creditors were consumers, they had not been given sufficient information by Amigo to be able to assess whether the scheme was fair.

There was also no evidence that the only alternative for the company was imminent collapse. Indeed, the evidence showed that the company’s share price had risen after the creditors had voted in favour of the scheme, suggesting that investors were optimistic about the future of the company.

In the court’s view, the most likely alternative was that the company would put forward a revised scheme. Since then, Amigo’s share price has gone down and it is considering all its options, including proposing a new scheme with revised terms or, alternatively, insolvency.

What this decision means is that if regulated lenders want to bind customers into such a scheme, they will need to consider what is a fair level of compensation. The court did not give any guidance on what a fair level would be, but it appears to require the lender to show that the compensation offered is the most that the company can afford without making insolvency the most likely alternative to the scheme. So a key factor that a lender would need to show the court is evidence of what effect the proposed level of compensation would have.

As far as banks are concerned, they also have to take this decision into account if they need to consider proposing a compensation scheme to avoid insolvency.

Fortunately, this has not happened before; instead, where banks have been accused of mis-selling to customers on a mass scale, such as in relation to interest-rate-hedging products, they have offered an FCA-approved scheme which determines the level of compensation, only after an investigation on a case-by-case basis. That must continue to be the best route for banks, rather than attempting to force customers to accept a low level of compensation across the board – an approach which we can see now that the FCA and the courts would strongly resist.

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Longer Reads

Lessons for banks from subprime lender Amigo’s woes

A UK high court decision means that if a bank wants to bind customers into a compensation scheme, it needs to consider what is a ‘fair level’ of compensation.

Originally published in The Banker.

Published 8 July 2021

Associated sectors / services

Authors

Banks will need to carefully consider the implications of the UK high court’s May 24 decision to reject a scheme of arrangement proposed by British subprime lender Amigo Loans, on the grounds that the proposed scheme to deal with complaints of mis-selling was not fair.

The Financial Conduct Authority’s (FCA) intervention caused the court to refuse to sanction the scheme, even though it had been approved by the requisite majority of creditors.

This case shows that the FCA will try to prevent a regulated lender from proposing a restructuring scheme that would have the effect of binding customers into a low level of compensation where there is no evidence that the alternative is for the company to imminently collapse.

Amigo provides loans to people who would not be able to borrow from mainstream lenders. The loans are required to be guaranteed by someone with a stronger credit profile.

The company’s problems arose from accusations of unaffordable or unsustainable lending, for which customers are entitled to compensation under FCA rules. It had to make a £150m accounting provision for this and, in response, it proposed a compensation scheme for its customers as a way of restructuring its debts. That formed the basis of a scheme of arrangement which could bind-in its customers. Amigo claimed that the only alternative to the scheme was for the company to go into administration.

The FCA objected that the compensation of 5-10% offered to customers was too low to be fair, in a situation in which the shareholders would lose nothing. It also disputed that the only available alternative was for the company to go into administration. The court agreed, saying that although the scheme had been approved by 95% of those voting at a creditors’ meeting, only about 8% of creditors had attended that meeting. It added that since the creditors were consumers, they had not been given sufficient information by Amigo to be able to assess whether the scheme was fair.

There was also no evidence that the only alternative for the company was imminent collapse. Indeed, the evidence showed that the company’s share price had risen after the creditors had voted in favour of the scheme, suggesting that investors were optimistic about the future of the company.

In the court’s view, the most likely alternative was that the company would put forward a revised scheme. Since then, Amigo’s share price has gone down and it is considering all its options, including proposing a new scheme with revised terms or, alternatively, insolvency.

What this decision means is that if regulated lenders want to bind customers into such a scheme, they will need to consider what is a fair level of compensation. The court did not give any guidance on what a fair level would be, but it appears to require the lender to show that the compensation offered is the most that the company can afford without making insolvency the most likely alternative to the scheme. So a key factor that a lender would need to show the court is evidence of what effect the proposed level of compensation would have.

As far as banks are concerned, they also have to take this decision into account if they need to consider proposing a compensation scheme to avoid insolvency.

Fortunately, this has not happened before; instead, where banks have been accused of mis-selling to customers on a mass scale, such as in relation to interest-rate-hedging products, they have offered an FCA-approved scheme which determines the level of compensation, only after an investigation on a case-by-case basis. That must continue to be the best route for banks, rather than attempting to force customers to accept a low level of compensation across the board – an approach which we can see now that the FCA and the courts would strongly resist.

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