What has happened?

The Financial Conduct Authority (FCA) has started an investigation into Amigo Loans (Amigo), a London Stock Exchange listed guarantor lender, to examine whether its assessments of customers’ creditworthiness were compliant with UK regulations. This follows on the footsteps of the FCA’s 2019 investigation into Wonga, which operated in a similar sector of the market, and its collection and arrears processes.

What has brought Amigo to the FCA’s attention?

The FCA itself has not released a statement but, according to Amigo’s press release, the investigation will cover Amigo’s lending from November 2018, which is when new rules came in to (i) protect consumers from unaffordable lending and (i) govern how lenders assess borrowers’ creditworthiness. The new rules revised the definition of ‘creditworthiness’ as consisting of credit risk and affordability, meaning lenders must now consider both the risk to themselves that the customer will not repay and how difficult it may be for the customer to meet repayment obligations. Additionally, there has been a spike in FCA complaints about Amigo’s conduct since the new rules came into force, which will have raised the lender’s profile on the FCA’s radar.

In addition to the new rules and the FCA’s apparent eagerness to ensure they are being complied with, Covid-19 forbearance measures allow borrowers payment holidays on principal amounts, but may not prevent interest payments being due, meaning that many borrowers affected by Covid-19 may still be unable to afford to service these interest payments. This will further bring into focus whether the affordability checks were suitably robust.

What action can the FCA take?

At the conclusion of its investigation, the FCA will likely send a preliminary findings letter to Amigo inviting Amigo to confirm the facts set out by the FCA and to provide further comment. In light of the responses it receives, the FCA may, if it determines that there has been a breach of the applicable rules, decide to take enforcement action including:

• issuing a statutory notice setting out either (i) a warning or (ii) a decision to publish a statement or impose a penalty;
• following the two notices above, issuing a final notice imposing a financial penalty and/or (ii) a public censure; and/or
• suspension of Amigo’s permission to carry on regulated activities or restriction on its ability to carry on such activities.

Consequences

As set out above, this investigation is demonstrative of the FCA’s increasing regulation in space over the last few years and their willingness to enforce the new rules with at least financial penalties (they ordered Wonga to pay compensation of over £2.6m to around 45,000 customers). So far the attention has been given to the largest, highest-profile lenders in this space but over time the FCA’s attention may well trickle down to more modest sized lenders. From Amigo’s point of view, subsequent press has revealed (i) that the only potential buyer for the business has pulled out of a sale process that was started in January and which will now be cancelled and (ii) that Amigo has decided to conserve cash rather than pay an intended dividend, which could act as a reserve against any compensation payments ordered by the FCA (as well as to see the business through Covid-19).