Subprime lending is infamous for incubating the Great Financial Crisis. The catchall term applies to any lending made to borrowers with poor credit standing, those people or businesses with patchy loan payment histories.
Since 2008, when billions of dollars of subprime mortgages almost crashed the financial system, regulators have kept a beady eye on subprime lenders.
You might therefore wonder why the Financial Conduct Authority appears to have gone easy on Amigo Loans. This week the watchdog waived a £73mn fine on the business, which lends to borrowers guaranteed by friends or family.
The business had failed to conduct proper affordability checks. Many guarantors were left holding large debts they could not afford to pay.
The FCA publicly censured Amigo because the business has no money to cover financial penalties. The public ticking off would be a heinous punishment for an old-fashioned City gent. It is a boon to a cash-strapped lender whose reputation is in ruins
Not long after Amigo listed on the London Stock Exchange in 2018 regulators discovered the company was not carrying out correct checks on customers.
A resulting flood of compensation claims threatened to bankrupt Amigo. That forced the company to agree to settle claims at a rate of about 40p in the pound.
To make payments at that level, Amigo needs to raise £45mn of new money from shareholders. Its stock is now valued at £15mn compared with £1.2bn in 2018. Getting shareholders to put up fresh money will not be an easy task.
The FCA eschewed a fine to improve the chances of a bigger redress payment for borrowers. Amigo has until May to raise the funds. If it fails, compensation payouts will be smaller and Amigo will be liquidated.
Amigo has been piloting a new lending scheme since the end of last year. Regulators are monitoring this closely. Amigo would spend £30mn of new funds on trying to grow this business.
It is moot whether the FCA should give Amigo a second chance. However, regulators have to strike a balance between cost and availability in overseeing the loans industry. Subprime lenders charge steep interest rates, but in return extend credit to communities which high street banks disdain.
Tougher regulation has shrunk the sector, creating opportunities for illegal loan sharks. Payday lenders such as Wonga are much diminished. Provident Financial, which specialised in doorstep lending, faced mis-selling claims and decided to exit a business it was in for 140 years.
In the afterglow of the 2018 float, Lex liked Amigo’s business model but not its regulatory risks. There is a broader snag with new lenders that investors should always bear in mind. They inevitably start with a record of zero borrower defaults. The drag on profits from these can only increase with time.
In the meanwhile, the investor should take a sceptical view of any claims the lender makes to having superior skill in assessing creditworthiness.
Amigo’s simpler failure was that it did not even assess creditworthiness to the basic standard required by the FCA.
Hargreaves Lansdown: the Peter principle
Hargreaves Lansdown showed that selling tools for the investment gold rush could be more lucrative than panning for treasure amid share listings. Set up by two entrepreneurs in the 1980s, it is the UK’s biggest platform for ordinary folk to trade shares and to invest in funds and other savings products.
Co-founder and billionaire Peter Hargreaves has lately lambasted the strategy of current management, however. His successors plan to spend big on “augmented advice”, with the aim of exploiting the power of vast amounts of customer data on hand.
The market reaction at results this week prove that other shareholders are equally sceptical about the strategy of chief executive Chris Hill. Initially, shares rose 7 per cent on Thursday. An equally sharp reversal ensued.
Benefits from the tech push have been limited so far. Rising interest rates have provided a bigger boost. A billion pounds of net inflows went into fixed-rate savings products in the final quarter of last year.
Higher interest rates also generated fatter net interest income of £125mn in the period, against just £12mn in 2021. However, underlying costs rose 14.6 per cent year on year to £146mn.
Gains from software-generated advice are limited to 690,000 automated recommendations to customers. Hill envisages the shift will eventually make clients stickier, yielding a higher share of wallet. But not until after a £225mn spending plan concludes in 2026.
While Hargreaves Lansdown may have pioneered DIY investing, big profits have attracted competitors. AJ Bell, Interactive Investor and others have been taking a larger slice of the pie, while the big incumbent stands still.
Intensifying rivalry means that dealing platforms will need to embrace technology-powered advice. The question is whether a retail savings business can develop this capability in-house. Tech giants are ploughing billions into creating broader solutions that could be fruitfully adapted by smaller groups.
Hargreaves Lansdown would do better to fight the competition head-on with lower fees and better execution.
Lex is the FT’s concise daily investment column. Expert writers in four global financial centres provide informed, timely opinions on capital trends and big businesses. Click to explore
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