Save, make, understand money

Credit Cards & Loans

Amigo under fire over lax affordability checks

Paloma Kubiak
Written By:
Paloma Kubiak

Amigo has received a ticking off from the financial watchdog over inadequate affordability checks. But it has dodged a £73m fine which would have impacted its ongoing redress scheme.

The sub-prime lender has been publicly censured by the Financial Conduct Authority (FCA) for failing to conduct adequate affordability checks on borrowers and guarantors.

It said between 1 November 2018 and 31 March 2020, Amigo Loans Ltd (Amigo), “did not have appropriate processes in place” to ensure applicants and their circumstances were properly assessed before approving a loan.

This resulted in some borrowers being unable to afford their loans, which required their guarantor to step in to meet the payments. In fact, one in four Amigo guarantors had to help out.

The FCA would have imposed a £72.9m fine over the rule failure. However, Amigo said this would cause it “serious financial hardship”, and the regulator accepted that it could have threatened its ability to pay redress to customers – a commitment made under a High Court order.

Inadequate affordability checks

As Amigo operates a guarantor loan model, where the person applying to borrow money is required to have another person – typically a family member or friend – guarantee that if they’re unable to make a repayment for the loan, the guarantor will make payments on their behalf.

Both borrowers and guarantors needed to pass Amigo’s affordability checks for a loan to be approved.

However, the FCA said Amigo’s assessment of whether a customer could afford to borrow was “inadequate”.

It explained that Amigo’s lending decisions relied heavily on the use of a “complex IT system with a high degree of automation”.  This meant some loan applications were approved where it was potentially unaffordable for the customer.

Where a manual review was flagged, often staff didn’t sufficiently consider or probe information provided by customers before approving a loan.

But these issues were made worse by a failure by Amigo to “adequately consider regulatory requirements around affordability and act sufficiently on identified weaknesses in its approach to creditworthiness.

“These failings meant there was an increased risk that guarantors would have to step in,” the FCA said.

Indeed, one in four of Amigo’s guarantors were asked to step in and make payments to assist struggling borrowers at some point during the term of the loan.

Amigo was also blasted for failing to maintain adequate records of historic business processes and “negligently” deleting former staff email accounts which hampered the FCA’s investigation.

‘Commercial interests above safeguard obligations’

Mark Steward, executive director of enforcement and market oversight at the FCA, said: “Amigo failed to assess properly the affordability of its lending, especially to vulnerable consumers, as our rules required. This led to lending that was unaffordable for some and meant guarantors had to step in. It also had the effect of prioritising the firm’s commercial interests over the obligation to comply with the rules and safeguard customers from unaffordable loans.

“The firm proposed a scheme of arrangement as Amigo could not afford the sizable redress bill in full. Following intervention by the FCA, the scheme was ultimately approved by the creditors, including the affected customers, and by the Court. The scheme aims to ensure an amount of redress is paid to affected customers that is better for customers, in these parlous circumstances, than any other likely outcome.”

‘Apologies for past failings’

Amigo said since the enforcement action started in 2020, “the board of the company has completely changed and the senior management team substantially refreshed”.

“This approach has allowed Amigo to reflect on the past behaviours and to develop its new business proposition, RewardRate, which “fully incorporates the lessons learned”.

Danny Malone, chief executive of Amigo, added: “I would like to apologise again to any customers impacted for the past failings in lending practises that occurred during the period 2018-2020. As a new Board and management team, we fully accept the lessons that needed to be learnt for the future and our focus remains on rebuilding a business that delivers better outcomes for customers, backed by stronger lending controls and a better culture.

“The FCA’s decision in October 2022 to allow Amigo to return to lending on a pilot basis reflects the significant change that has been undertaken in the business, and we would like to thank the FCA for working constructively with us. The conclusion of this investigation enables us to draw a line under these historic lending issues as we seek to secure the capital required for the future.”