Amigo faces insolvency after UK court rejects compensation cap | Financial sector
Subprime lender Amigo faces potential collapse after confirming it will not appeal a High Court ruling that blocked a program to cap clients’ compensation.
Amigo, who charges 49.9% interest and requires borrowers to provide a friend or family member to act as a guarantor, said he would “consider all options” and consider an alternative program to manage the costs of an increase in customer claims.
However, developing a new regime could be costly and take months, and would still have to be approved by its creditors and the courts.
The lender would also need the support of its regulator, the Financial Conduct Authority, which criticized its first program for being unfair to some of the UK’s poorest borrowers.
Amigo, who gained popularity after rival Wonga’s demise in 2018, has been inundated with abusive sales demands from clients who have accused the company of making unaffordable loans. But Amigo said he was unable to meet the growing costs of those claims and was at risk of going bankrupt unless he could cap benefits under a program covering nearly one million of its current and former customers.
But last week, the High Court refused to approve Amigo’s program, which could have seen successful complaints receive only 5% to 10% of any successful claim, and capped the compensation pool to a maximum. £ 35million and 15% of four-year profits.
Executives have warned that Amigo is likely to collapse unless a new proposal is made. “Without a plan, Amigo risks insolvency as it will not be able to meet its clients’ compensation claims and meet legally binding funding obligations owed to its secured creditors,” said Amigo’s CEO. , Gary Jennison.
“The Board of Directors is committed to finding the best possible solution for Amigo’s customers and other stakeholders and will work with its stakeholders, including FCA, to achieve this solution as quickly as possible,” said he added.
The looming threat of corporate insolvency caused stocks to drop 11% Tuesday morning to 7.3%. Nervousness over the company’s future has caused stocks to fall 75% in the past month. Amigo shares have lost 97% of their value since their peak in December 2018.
John Cronin, a financial analyst at brokerage firm Goodbody, expects Amigo to come up with a new proposal that would increase its share of future earnings. “Given that this is an option for the board of directors, it is difficult to see why Amigo would choose the insolvency route instead,” he said.
“However, how far Amigo needs to go to gain court and creditors approval for a second program is an open question – and the company’s dialogue with the regulator in the coming weeks will inform its decision in this regard,” Cronin added.
Amigo has frozen customer payments while he considers his options. Debt activists have warned that this would put more pressure on vulnerable borrowers who should continue to repay their loans despite filing a lawsuit that could eventually see their loan canceled.
“A delay of a few more months will be very painful for Amigo clients with currently unaffordable loans,” said Sara Williams, author of Debt Camel, a blog that advises people on money issues.
“The FCA has agreed to Amigo having a moratorium on refunds. But this moratorium should be two-way, with customers able to stop reimbursing if they have a complaint that is currently in limbo, ignored by Amigo and unable to be referred to the mediator. “