Amigo Loans enforcement action: your Duty to act
In an unusual move for the FCA, it has decided to issue a public censure to Amigo loans following an investigation which highlighted significant failings in its affordability practices. As a result, Amigo has escaped what would have been a significant fine of c.£73m.
The decision to adopt a public censure and waive the fine reflects the FCA’s commitment to consumer protection, as Amigo demonstrated the fine would cause significant financial hardship which would not be conducive to it meeting the continuing obligations under its High Court sanctioned scheme of arrangement which aims to pay redress to customers.
But firms should be under no illusion that this was a “soft” outcome. The Notice is an interesting read which reinforces the regulator’s expectations in areas where the rules are traditionally less prescriptive, such as the handling vulnerable customers, and creditworthiness CONC rules. And it is highly likely that this would have been more severe had the failings been assessed under the new Consumer Duty.
Given our involvement in a historic piece of work relating to this case, we’ve highlighted the key messages and reflections from a Consumer Duty perspective for firms to consider:
Act to avoid foreseeable harm
The core issue in this Final Notice was a failure to conduct adequate affordability checks on borrowers and guarantors, which ultimately led to irresponsible lending. There are clear examples of how Amigo did not act to avoid foreseeable harm as it failed to:
include ‘appropriate parameters, triggers and controls’ in its automated lending decisions;
correctly verify income and expenditure using independent sources;
identify actual and potential financial vulnerabilities as part of its onboarding processes; and
consider the information provided by customers, and probe where there were inconsistencies.
Firms should review their current practices in light of these failings and ensure there are appropriate controls in place within lending models, and in relation to the identification of actual and potential vulnerability. See our gap analysis for a ready-made, accessible and comprehensive way of self-assessing against this case.
Products and services
The Products and Services outcome requires Firms to ensure products are ‘fit for purpose’ and aligned to the target market. Firms should identify any practices that may increase the risk of customer harm and take steps to mitigate this. The FCA specifically call out that Amigo operates in the sub-prime sector, with a customer base prone to vulnerability based on restricted access to credit and reliance on benefit income. Despite this the Firm failed to take reasonable steps to mitigate risk of harm, as it applied a narrow definition of vulnerability and only identified 1% of customers as vulnerable. It also failed to consider the purpose of benefit income when including this in its Income and Expenditure assessment.
Customer understanding
Amigo failed to provide guarantors with an adequate explanation of their responsibility under the agreement to highlight the risks and help them decide whether or not to guarantee the loan. This is directly linked to the Consumer Understanding outcome which places stringent requirements on Firms to ensure that written and verbal communications support consumers to make informed decisions. Firms should pay particular regard to how they can adapt and use communications to convey important information such as the pre-contractual disclosures and adequate explanations required by CONC.
Acting in good faith
The FCA do not currently specify how firms should design and run their pay (remuneration) and reward (incentive) schemes and there is limited guidance around culture. However, the notice highlights issues with Amigo’s commercial focus and incentives which were ‘heavily weighted towards loans paid out’. Such practices would be in breach of the Duty, as remuneration based on loan volumes is unlikely to encourage staff to act in good faith, and the Firm failed to create a culture centred around providing good customer outcomes. Many Firms will likely fall foul of the same practices without a shift in both culture and staff behaviour.
Governance and oversight
The Duty places a higher standard on Firms to implement robust governance frameworks. It also requires Boards to review the delivery of good outcomes on an at least annual basis. Firms should learn from the concerns raised in relation to Amigo’s:
lack of governance and oversight
inadequate policies and procedures for affordability
lack of ownership for affordability at a senior level
failure to identify key issues and risks and within its lending model due to insufficient monitoring and MI
Firms should take this as a reminder to review the effectiveness of governance frameworks to ensure that there are sufficient mechanisms to enable the Board and senior management to monitor and manage key risks.
What you need to do
The FCA specifically call out Amigo’s failure to act on regulatory publications such as this, which should have put them on notice to its concerns. To avoid any similar interaction, you should read, assess and take action on the key themes within this publication – see our gap analysis.
Avyse Partners can work with you to ensure that your processes are sufficiently robust. We have extensive experience working with credit firms, particularly when subject to regulatory scrutiny or enforcement action. And my unique experience in this particular case sets our advice apart from our peers. Get in touch to discuss how we can help.
Shaneca
