Amigo Regulatory News (AMGO)

20 July 2020

Amigo Holdings PLC

Financial results for the year ended 31 March 2020

Amigo Holdings PLC, (Amigo or the Company), the leading provider of guarantor loans in the UK, announces results for the year ended 31 March 2020.

Financial Headlines

▪ Net loan book reduction of 9.1% year on year to £643.1m (2019: £707.6m)

▪ Revenue growth of 8.7% (2019: £270.7m) to £294.2m

▪ Impairment:revenue ratio at 38.5% (2019: 23.7%) reflecting material impact from Covid-19*

▪ Operating cost:income ratio (excluding complaints) of 20.2% (2019: 17.5%) due to increased investment*

▪ Complaints cost of £126.8m and complaints provision of £117.5m as at 31 March 2020 driven by an increase in complaints volumes (complaints cost 2019: £0.1m; complaints provision 2019: £nil)

▪ Reported statutory loss after tax for the period of £27.2m, (2019: £88.6m profit)

▪ Total dividend per share relating specifically to the financial year: 3.1p (2019: 1.87p) as paid in January 2020. To conserve capital the Board is not recommending a final dividend

▪ Net borrowings/adjusted tangible equity: 2.4x (2019: 1.9x). Gearing remains low at around pre-IPO levels*

▪ £64.3m of cash and cash equivalents as at 31 March 2020 (2019: £15.2m); unrestricted cash balance of over £135m as at 30 June 2020

▪ The Board notes that a material uncertainty exists relating to going concern due to Covid-19 and the potential for either a sustained high level of customer complaints redress or a negative outcome of the FCA investigation (see note 1.1 to the financial statements). Despite this, the Board considers there to be adequate liquidity to continue to support the ongoing business activity

 Operational Headlines

▪ Lowering of overall Group risk appetite as the regulatory landscape continued to evolve resulting in (i) lower levels of repeat lending and (ii) increased lending to new customers, as a proportion of originations

▪ All new lending temporarily paused on 24 March 2020 in response to Covid-19, except to key workers in exceptional circumstances

▪ Formal sale process (FSP), launched in January 2020, terminated following withdrawal of potential acquirer. A strategic review is ongoing

▪ Shareholders voted against all resolutions to remove the Board and appoint new directors at the General Meeting on 17 June 2020, which was requisitioned by Richmond Group Limited (RGL)

▪ Post-year-end agreement reached with FCA on resolving complaints backlog by 30 October 2020, and FCA investigation into Amigo's creditworthiness assessments initiated

*Detailed definitions and calculations of these alternative performance measures (APMs) can be found in the APM section of the financial statements

Commenting on the Full Year results, Roger Lovering, Acting Chair of Amigo, said:

"The last 12 months have been a challenging and difficult period, which is reflected in our results today. We are operating against an evolving regulatory picture, while facing economic uncertainty due to the Covid-19 pandemic. Subsequent to our year-end, we have seen a substantial increase in the volume of complaints and this has led us to make a significant provision, which resulted in an overall loss for the financial year. We continue to engage productively with our regulators to understand the evolution in their approach and anticipate that this will remain an ongoing focus for the new Board members of Amigo.

"The statements from our major shareholder in January 2020 led to the launch of a strategic review and a formal sale process. The formal sale process has now concluded with the withdrawal of the potential acquirer. With the recent General Meeting now behind us and Glen Crawford reappointed as CEO, Amigo will move forward with more clarity and a determination to resolve the challenges we face. 

"Amigo plays an important role in the lives of its customers, providing access to finance to those unserved by mainstream lenders, and this proposition remains as relevant as ever. Our dedicated teams at Amigo truly believe in our product and I would like to thank them all for their continued commitment, particularly through this unprecedented and challenging time."

Analyst, investor and bondholder conference call and webcast

Amigo will be hosting a live webcast for investors and bondholders today at 09:30 (London time) which will be available at: https://www.amigoplc.com/investors/results-centre. A conference call is also available for those unable to join the webcast (Dial in: + 44 20 3936 2999; Access code: 828935). A replay will be available on Amigo's website after the event.

The presentation pack for the webcast shows the reconciliation between the PLC results and Amigo Loans Group Limited (the 'Bond Group').

Notes to summary financial table:

1Number of customers represents the number of accounts with a balance greater than zero, now exclusive of charged off accounts.

2Net loan book represents total outstanding loans less provision for impairment excluding deferred broker costs.

3 Operating cost:income ratio is defined as operating expenses divided by revenue, excluding complaints

4 (Loss)/profit after tax otherwise known as (loss)/profit and total comprehensive income to equity shareholders of the Group as per the financial statements.

5Net borrowings defined as borrowings, less cash at bank and in hand. Adjusted tangible equity is defined as shareholder equity less intangible assets, plus shareholder loan notes.

Contacts:

Amigo investors@amigo.me

Nayan Kisnadwala, CFO

Kate Patrick, Head of Investor Relations 

Hawthorn Advisors amigo@hawthornadvisors.com

Lorna Cobbett Tel: 020 3745 4960 

About Amigo Loans

Amigo is a public limited company registered in England and Wales with registered number 10024479. The Amigo Shares are listed on the Official List of the London Stock Exchange.

Amigo is a leading provider of guarantor loans in the UK and offers access to mid‐cost credit to those who are unable to borrow from traditional lenders due to their credit histories. The guarantor loan concept introduces a second individual to the lending relationship, typically a family member or friend with a stronger credit profile than the borrower. This individual acts as guarantor, undertaking to make loan payments if the borrower does not. Amigo was founded in 2005 and has grown to become the UK's largest provider of guarantor loans. In the process, Amigo's guarantor loan product has allowed borrowers to rebuild their credit scores and improve their ability to access credit from mainstream financial service providers in the future. Amigo is a mid‐cost provider with a simple and transparent product ‐ a guarantor loan at a representative APR of 49.9 per cent., with no fees, early redemption penalties or any other charges. Amigo Loans Ltd and Amigo Management Services Ltd are authorised and regulated in the UK by the Financial Conduct Authority

Forward looking statements

This report contains certain forward-looking statements. These include statements regarding Amigo Holdings PLC's intentions, beliefs or current expectations and those of our officers, Directors and employees concerning, amongst other things, our financial condition, results of operations, liquidity, prospects, growth, strategies, and the business we operate. These statements and forecasts involve risk, uncertainty and assumptions because they relate to events and depend upon circumstances that will or may occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements. These forward-looking statements are made only as at the date of this announcement. Nothing in this announcement should be construed as a profit forecast. Except as required by law, Amigo Holdings PLC has no obligation to update the forward-looking statements or to correct any inaccuracies therein.

Acting Chair's Statement

The financial year ended 31 March 2020, and beyond, has been a difficult period for Amigo and our stakeholders. We have faced many challenges whilst operating against a backdrop of an evolving regulatory landscape and the economic uncertainty surrounding the Covid-19 pandemic. It has been particularly saddening to have had a dispute with our largest shareholder, Richmond Group Limited (RGL), and founder, with much of this dispute played out in the public domain. In January 2020, statements from RGL led us to launch a strategic review of the business and formal sale process (FSP) and in June a General Meeting was held, requisitioned by RGL, proposing to remove all members of the Board. Prior to the meeting, RGL indicated that it would sell down its entire holding if the resolutions were not passed. Accordingly, it commenced a daily sell down of 1% of Amigo's issued share capital on 18 June 2020.

As a Board, we recognise the significant loss of shareholder value. Following the General Meeting, with the resolutions rejected, we now have a way forward and will look to rebuild the Board. I would like to assure our investors that we are working hard to address these challenges and to quickly put Amigo back on a positive footing.

Complaints

The substantial rise in complaints received, notably post year end, is the biggest challenge we face as a Group. While we cannot be certain how this will develop further, we have today announced a significant provision. We have built capacity to cope with this increase in volume of complaints and are engaging with the FOS and our regulator to provide a route forward.

There has been increased regulatory focus on the guarantor loan sector over the last 18 months. After the year end, at the end of May 2020, the FCA announced that it would be undertaking a review of our creditworthiness assessments from November 2018 to date. At this stage it is too early to say what the outcome of the investigation will be, but we welcome the opportunity to better understand the regulator's approach over this period.

Covid-19

Following the outbreak of the Covid-19 pandemic, which continues to affect communities globally, approximately 47,000 of our customers have been granted a payment holiday. To help our customers we have included a break from interest for the first three months of any pause in payments and we will work with our customers to help them transition back to a normal payment plan.

It is a testament to the agility of our digitalised business model and commitment of our people that we were able to respond at speed to the pandemic, migrating almost 400 employees to home working by the end of March 2020, with no disruption to our customer service. Our top priority remains the health and wellbeing of our employees, customers and partners as we begin a phased return to our offices. I am also pleased that as a business we have been able to pledge £100,000 to help five charities at this difficult time: three national charities supporting the NHS, the elderly and the homeless; and two local partner charities, including a local children's hospice and a charity that provides financial assistance to those suffering with cancer.

I am profoundly proud of how our teams have adapted to the challenges we have faced and would like to express my deep thanks to all of our people for their hard work and dedication, maintaining our service to our customers throughout.

Board

On 17 June 2020 a General Meeting was held, having been requisitioned by RGL, with resolutions to remove each of the five members of the Board at that time and appoint two alternative named directors in their place. All resolutions were opposed with over 90% of the minority shareholders that voted supporting the Company. Prior to the vote, the existing Board members had indicated their willingness to step down.

In December 2019, the resignations from the Board of former Chair Stephan Wilcke, CEO Hamish Paton and former Non-Executive Director Clare Salmon were announced. Clare subsequently left the business on 5 February 2020 and Stephan on 18 June 2020, although he remains as a consultant to the business for an interim period (on a no-fee basis). It has been agreed that Hamish will leave Amigo on 31 July 2020. As a result, Richard Price was appointed Interim Chair of the Remuneration Committee and I was appointed Chair of the Nomination Committee. On 18 June 2020, I also took up the position of Acting Chair until such time as a permanent replacement is appointed.

I am delighted, on behalf of the Board, to welcome back Glen Crawford, who will be re-joining Amigo as CEO and Board member, having left for medical reasons in 2019. Subject to the necessary regulatory approvals, it is intended that Glen's appointment will take effect from 1 August 2020. Glen is a natural choice and brings experience and leadership to the Company at this challenging time. The search for a suitable replacement Chair of the Board is progressing well.

On behalf of the Board, I would like to thank Stephan, Hamish and Clare for their contributions during what has been a difficult time for both the Company and for them personally.

Good governance is important to us and the process is underway to return the Board to an appropriate composition in accordance with the UK Corporate Governance Code.

Formal sale process

Amigo has concluded the formal sale process announced on 27 January 2020. The FSP identified a number of potential acquirers which made indicative offers that were materially above where Amigo's shares were trading at the time they were received and that the Board considered worthy of further investigation. However, the potential acquirer with whom the Company had been in discussions withdrew from the process in June and the Board subsequently announced the termination of the FSP.

Dividend

Due to the uncertainty caused by the Covid-19 pandemic and the increased complaints provision, the Board is taking steps to conserve cash and maximise financial flexibility. Therefore, the Board has decided that it will not propose a final dividend payment for the year ended 31 March 2020. The cash cost of last year's final dividend was £35.4m.

Outlook

Amigo faces a number of challenges which the Board and wider team are working hard to address. The economic impact of Covid-19, a potential increase in the level of complaints received and the possible outcome of the FCA investigation have led to a material uncertainty surrounding going concern. Despite this, the Board considers there to be adequate liquidity to support our business. As at year end, we had equity of £167.4m after making the £117.5m provision for complaints, and as at 30 June 2020, we have unrestricted cash of over £135m.

Despite the difficulties we face, it is important to remember that Amigo serves a purpose in providing financial inclusion to those who are unable to access finance through mainstream lenders. This will be even more important as the country recovers from the economic impact of Covid-19 as during times of economic stress finance providers may retreat from the non-standard finance market, further limiting customers' choice. We have optimised our processes to enable us to resume lending quickly when it is appropriate to do so.

The result of the General Meeting has provided clarity over the Group's governance and we can now move forward without distraction. We will continue to engage proactively and positively with our regulators and are moving swiftly to bring stability to our leadership team. The long-term drivers of our business are unchanged, we have fantastic employees and a clear focus on the challenges and opportunities we face.

CEO's Review

The financial year ended 31 March 2020 has been challenging both for Amigo and the wider sector. Through the course of the year we actively reviewed our approach to lending, reflective of an evolving regulatory landscape and an uncertain economic outlook. We tightened our underwriting assessments and our risk appetite. A reduction in repeat lending was implemented by Amigo during August 2019 and this was followed by a further lowering of Amigo's risk appetite in the second half of the year, as part of the strategic review. At the same time, we continued to strengthen our creditworthiness assessments to minimise risk for our borrowers, our guarantors and ourselves. At the end of March 2020, with the onset of Covid-19, we took the additional step to pause new lending to all customers, except for key workers meeting certain criteria. We continue to review our approach to lending as the situation develops. While Covid-19 actions had minimal impact on our full year performance, the lower originations and repeat lending resulting from the adjustment to our risk appetite, and an increase in the forward-looking impairment provision, led to an overall reduction in the net loan book of 9.1% compared to last year. Customer numbers and revenue in the year increased by 10.4% and 8.7% respectively, reflecting continued demand for our guarantor loan product and an increase in the average gross loan book over the year. However, increased provisions for both impairment and complaints contributed to a reported loss for the year of £27.2m.

Complaints

Over the past financial year, we have seen an evolution in the FOS' approach to its handling of complaints, resulting in a significant increase in the number of complaints the FOS has upheld in the customers' favour. In addition, we saw the level of complaints begin to increase from Q2 onwards. After the year end, the level of complaints increased substantially, with the majority of complaints coming from claims management companies.

In May 2020, we agreed a Voluntary Requirement (VReq) with the FCA to work through and reach a decision, before the end of June 2020, on a backlog of complaints that had developed. An amended VReq was agreed in July, covering a higher volume of complaints, with the deadline extended to the end of October 2020. We have upskilled and resourced our Complaints team to adapt to the significant increase in the volume of complaints received and we have taken independent advice on our complaints handling.

The cost of complaints in the year has increased to £126.8m with a remaining balance sheet provision of £117.5m as at 31 March 2020. The evolving situation, both in terms of an apparent regulatory evolution in outlook and the subsequent rise in complaints, is a challenge and one we are seeking to resolve as quickly as possible.

Operations

Excluding the cost of complaints, the ratio of operating expense to revenue at 20.2% reflects the continued efficiency in the Amigo model. As origination volumes decreased towards the end of the financial year, we have seen an associated reduction in acquisition and marketing costs.

The increase in the impairment provision has been driven in part by the impact of the worsening and uncertain economic outlook related to the Covid-19 pandemic on forward-looking assumptions and expected credit losses under IFRS 9. Earlier in the financial year, we reported an increase in the impairment provision due to operational capacity constraints where we had not grown our Collections teams in line with the high demand we had seen for our guarantor loan product and the resultant growth in customer numbers. We have made good progress since October 2019 with initiatives introduced to address this, with additional resource added to our Collections teams through both external recruitment and internal redeployment.

We regularly monitor and assess productivity and continue to invest in our people and technology accordingly. The ongoing investment in our bespoke IT systems and our processes has allowed greater automation and self-servicing, while retaining the personal element to Amigo's customer service. Over the year we have made changes to our customer journey, improving productivity and customer experience, for example by extending our use of open banking.

Our business in Ireland has progressed well over the year, growing its customer base significantly from its launch in February 2019, to achieve a net loan book of £5.8m by the end of the financial year. This is an encouraging start and demonstrates both demand for our product and our ability to successfully enter new markets.

Covid-19

Covid-19 presented an unprecedented challenge as we sought to protect our employees and follow government guidance while continuing to support our customers. I am immensely proud of our Amigo teams which succeeded in providing all employees with the appropriate equipment and support to facilitate remote working, while phasing in the transition to minimise the impact to our customers.

We introduced measures to help those affected by Covid-19. Where our customers are confident the impact is short term and is a result of Covid-19, we have introduced extra measures to support them. These include offering extended breathing space of up to six months to those experiencing potential payment difficulties, during which a customer's payments and contact are paused. In addition to this, we paused interest for customers for up to three months. As we cap the amount of interest our customers pay, this means that, despite the pause, they will not come back to higher monthly payments when they return to a normal payment plan and they will never pay more than stated in their original agreement. We have worked with the credit reference agencies to freeze the arrears status on a customer's credit file during this time, to ensure that the arrears status does not escalate while they are on extended breathing space. We continue to consider how our customers may be impacted in the longer term and what ongoing support we may be able to offer. For those who have an increased level of uncertainty around their longer-term finances, we can assist them with our existing forbearance options.

It is still too early to assess the full impact on our financial performance and as such it is not appropriate to issue guidance for this financial year. We have a strong cash position. Despite the special Covid-19 relief programme, cash collection has remained strong at 87% of pre-Covid-19 forecast projections. This includes the early settlement of some customer loans. We are well positioned to manage the challenges that the Covid-19 pandemic presents.

Regulatory update

The FCA has several sector-wide reviews ongoing for the non-standard finance sector including reviews of affordability, repeat lending and the treatment of vulnerable customers. Specific to guarantor lending, the FCA's reviews have focused on affordability, guarantor understanding and forbearance.

In November 2019, we received feedback from the FCA's multi-firm work into guarantor understanding. We have implemented a number of measures based on this feedback, providing more information to help our guarantors make an informed decision. While much of this was covered informally because of the relationship between the borrower and guarantor, this change formalises the sharing of this information.

In April 2020, we received initial feedback from the FCA's review into affordability. We had already tested changes to our affordability verification processes and, as a result, a number of the recommendations from the FCA had been, or were in the process of being, implemented prior to March 2020, when we paused lending. We have extended our use of open banking as part of affordability assessments, as the improvement in open banking tools mean they are becoming more acceptable to consumers. The remaining recommendations by the FCA will be implemented before we return to meaningful levels of new lending.

As announced on 1 June 2020, the FCA has initiated an investigation into Amigo's creditworthiness assessment process, and the governance and oversight of this process. The investigation will cover the period from 1 November 2018 to date.

The FCA's review into, and guidance on, vulnerability has been delayed due to Covid-19. We have a dedicated team assisting customers deemed more vulnerable and our priority has always been the fair treatment and wellbeing of all our customers.

The Covid-19 pandemic is undoubtedly putting pressure on the lending sector as a whole. Both the FCA and HM Treasury are monitoring the liquidity of all firms and we have been producing regular reports in accordance with their requests. We remain in a good position to help our existing customers through this difficult period and to return to providing our much needed guarantor loan product in time.

Looking forward

Whilst this last year has been challenging, it has also been a time when we have seen continued demand for our guarantor loan product. Amigo plays an important role in the lives of its customers, providing access to finance to those unserved by mainstream lenders. This proposition remains highly relevant.

In December 2019, I resigned as CEO and will leave the business at the end of July 2020 with former CEO, Glen Crawford, planning to return to the role from 1 August 2020. While it has been a difficult period, it has been a privilege to work with Amigo's teams of dedicated employees who believe in the business and its product. I would like to thank them for their support and commitment throughout. Amigo is a business of immense potential with a truly innovative product that plays a valuable role in society. With the General Meeting concluded, the business can now move forward and I wish the Board and Glen every success.

Financial review

Introduction

Results for the twelve months ended 31 March 2020 are representative of the challenging year faced by Amigo, exacerbated by the impact of the global Covid-19 pandemic from March 2020 onwards.

We have had to deal with several Board and management changes, operational challenges in the Collections team, a strategic review and a formal sale process, increasing levels of customer complaints and Covid-19 related challenges towards the end of the fiscal year. We faced these challenges proactively throughout the year. We increased staffing in Collections, the strategic review resulted in changes to our lending policies and risk appetite which we will implement post Covid-19 and we have implemented policies and processes to address complaints after obtaining advice from experts in the sector. Our digitalised model enabled us to respond rapidly following the outbreak of Covid-19, and we quickly implemented customer-centric relief measures.

While addressing these challenges, we ensured that we remained focused on our funding and undertook steps to improve our liquidity. We implemented cost management measures, cancelled dividends, paused lending and improved collections. We cancelled our revolving credit facility (RCF) post year end given our liquidity, and negotiated a pause in both the financial performance triggers and further borrowings from our securitisation facility until we fully understand the impact of Covid-19 on our arrears and impairments.

In February 2020, Amigo withdrew its guidance to the market on expected performance of key performance indicators (KPIs) due to these uncertainties.

Complaints

During the course of the past year, a major issue has arisen around customer complaints with regards to past lending decisions. Historically complaints have not been a material issue; for the year ended 31 March 2019 the complaints redress expense was negligible at less than £0.1m with only a small number of complaints made and very few of these being upheld or referred to the FOS.

In the year, we saw the FOS change its approach towards lending decision complaints, which lead to a much higher uphold rate on complaints referred to the FOS than we had previously experienced. The number of complaints found in favour of the customer by the FOS increased to 94% in the six months to end of December 2019, whereas historically the vast majority of cases were found in favour of Amigo. In response to this, Amigo has updated the way it investigates cases. As the change in the approach from the FOS resulted in an increased uphold rate, we recognised a provision for complaints received but not yet assessed in Q1. At that point in time, we had not seen any increase in the volume of complaints made. Volumes began to increase modestly in Q2, and we then added a provision for the portion of expected future complaints on existing loans where we thought it was likely that redress would be offered to the customer. Both incoming volumes and provisions have continued to rise since then, with a significant increase post the year end. More recently, claims management companies have emerged as the major source of complaints.

To address this challenge, a material increase in the complaints provision was recognised based on all available information at the date of signing this report, with a balance sheet provision of £117.5m as at 31 March 2020. The level of the provision has been increased to reflect the volume of complaints received. The total charge to the income statement in the year was £126.8m with £9.3m utilised in the period to award customers redress including both loan balance adjustments and cash payments. In accordance with IAS 37: Provisions, Contingent Liabilities and Contingent Assets, the provision relates to both the estimated costs of customer complaints received up to 31 March 2020 and the projected costs of potential future complaints where it is considered likely that customer redress will be appropriate, based on the available data on the type and volume of complaints received to date.

The provision is not intended to cover the eventual cost of all future complaints; such cost remain unknown. There is significant uncertainty around: the emergence period for complaints; the activities of claims management companies; and the developing view of the FOS on individual affordability complaints, all of which will significantly affect complaint volumes, uphold rates and redress costs. 

Amigo is committed to managing complaints raised by customers in accordance with regulatory requirements. Following the year end there have been several significant developments regarding the management of complaints. On 27 May 2020 Amigo announced it had agreed a Voluntary Requirement (VReq) with the FCA to work through a backlog of complaints principally arising in 2020 by the end of June 2020. On 3 July 2020 we announced that an amended VReq, covering a higher volume of complaints, had been agreed with the FCA. Under the terms of the amended VReq Amigo agreed to reach a position by 30 October 2020 where all complaints are dealt with appropriately within eight weeks. We have also hired external advisors and built up our claim handling infrastructure. These complaints do not represent a clearly identifiable cohort of lending; rather, each is assessed and, where complaints are upheld it is due to the particular circumstances of the case. We continue to investigate the root cause of complaints in line with regulatory expectations. The Company continues to explore all avenues to address this issue, including working with the FOS to understand the standards they are applying and challenging these outcomes where necessary. Amigo is open to the option of judicially reviewing decisions that we believe are wrong.

FCA Investigation

Separately, on 1 June 2020, the Company announced that the FCA commenced an investigation covering the period from 1 November 2018 into whether or not Amigo's creditworthiness assessment process was compliant with regulatory requirements. While this does not directly address complaints, any findings could have implications for how complaints are decided. At this time, the potential result and impact of this investigation is unknown.

Overall Financial Results

The Group delivered revenue growth of 8.7% in the year to £294.2m. Loss after tax was £27.2m, compared to a prior year profit after tax of £88.6m. When adjusting for items that are not business as usual in nature, adjusted loss after tax was £26.9m for the financial year ended 31 March 2020, down from prior year adjusted profit after tax of £100.1m. The decline in profitability since 2019 is driven primarily by the recognition of a complaints provision in the year, and also by an increase in our impairment provision, driven in part by the anticipated increase in expected credit losses as a result of the Covid-19 pandemic and the deterioration in the macroeconomic outlook.

Amigo's key performance indicators have been considered below when discussing business performance within the financial year. For detailed definitions and calculations of all alternative performance measures (APMs) mentioned, please see the APMs section to the financial statements.

Revenue growth

The Group generated revenue of £294.2m in the year, an 8.7% increase on the prior year (2019: £270.7m). The growth was driven in part by an increase of 10.4% in our customer numbers to 222,000 (2019: 201,000) confirming continued high demand for our product and an increase in average gross loan book year on year of 5.7% from £725.5m to £766.5m.

Customers

In August 2019, Amigo's credit policies were tightened, only relending to customers that have demonstrated an extended period of on-time payments. Our internal focus shifted to acquiring new customers with a new marketing campaign accelerating lead generation. As a result, we increased the number of borrowers we serve by a net 21,000, a 10.4% increase from the end of the prior year and we ended the year with 222,000 borrowers. The definition of our customer numbers has been refined in the year and represents the number of accounts with a balance greater than zero, exclusive of charged off accounts. This led to a restatement of the prior year's customer number, reducing it by 23,000 to 201,000.

Originations

Amigo announced a strategic review on 27 January 2020, which saw a reduction in the risk appetite for new lending in Q4. This, coupled with changes to repeat lending eligibility rules, led to a year-on-year reduction in originations of £78.7m to £347.4m (2019: £426.1m). Loans are originated through three channels, comprising direct and third-party channels for new customers, and repeat lending. The mix of lending has changed from 61% new customers and 39% repeat customers in the prior year, to 72% new and 28% repeat in the current year, reflecting the change Amigo made to its relending policy in the year.

On 24 March 2020, the uncertainty of the economic implications of the Covid-19 pandemic led to a temporary pause on all new lending activity except to key workers in exceptional circumstances, the full impact of which will affect the financial year ending 31 March 2021.

Loan book

We ended the year with a gross loan book (excluding broker fees) of £749.9m, a decrease of £33.1m or 4.2% from the prior year end (2019: £783.0m), with an average loan size of £3,378 (2019: £3,896). This is calculated as the total gross loan book divided by the number of borrowers. This reduction is reflective of the decline in originations in the year and the reduction of repeat lending.

The net loan book reduced by 9.1% year on year moving from £707.6m to £643.1m. This reduction is reflective of the decline in the gross loan book combined with the increase in the impairment provision year on year from £75.4m to £106.8m.

Our business in Ireland has grown in the financial year, contributing £7.2m to the consolidated gross loan book and £5.8m to the net loan book of at the year end. See note 3 in the financial statements for further details.

Margin and capital management

We have a simple business model with a representative APR of 49.9% and no other fees. This translates into a simple interest rate of 41.2%.

Revenue yield is defined by the Group as annualised revenue over the average gross loan book for the period. Revenue yield was 38.4% compared to 37.3% in the prior period.

Cost of funds is defined as interest payable as a percentage of average gross loan book over the financial year. Our cost of funds decreased to 4.0% in the year (2019: 5.3% inclusive of shareholder loan note interest, 4.4% without) primarily due to the opportunistic repurchase on the open market of £85.9m of our senior secured notes (2019: £80.0m) and the annualised impact of repurchasing £80.0m of notes in the prior year. This was enabled by Amigo's increased borrowing capacity following the introduction of our securitisation funding facility. At the year end we had a diversified capital structure including senior secured notes in the form of high yield bonds, a super senior revolving credit facility (RCF) and a securitisation facility, in addition to cash generated from our operations. There are no near-term maturity dates in our financing structure; the maturity of our senior secured notes is 2024 and our securitisation facility is due in June 2022 with a subsequent four year amortisation period to June 2026. The RCF was cancelled in May 2020 given the adequate liquidity position of the Group.

Funding (£m)

At 31 March 2020, Amigo had available undrawn facilities of £177.8m from its funding sources (2019: £195.0m), in addition to cash of £64.3m. On 27 May 2020 Amigo announced the cancellation of its super senior revolving credit facility (RCF). Revised year-end available undrawn facilities excluding the RCF is £68.3m; we note during the temporary pause period of the securitisation facility this headroom is unavailable. We will continue to have diversified sources of funding from an instrument, counterparty and tenor perspective, while we aim to lower the cost of funds over the next few years. From time to time the Group may opportunistically continue to buy back outstanding senior secured notes. The Board seeks to maintain a strong capital base in order to maintain investor, customer and creditor confidence and to sustain future development of the business.

The Group defines "net interest margin" as net interest income divided by average interest-bearing assets (being both gross loan book and cash) at the beginning of the period and end of the period. Our net interest margin was 32.7% for the period reflective of the reduction in cost of funds (2019: 31.4%).

Impairment

The Covid-19 pandemic has materially impacted our impairment provision; the impact is reflected in the provision by way of new macroeconomic assumptions and a staging overlay to reflect relief measures extended to customers during the outbreak.

Towards the end of the final quarter of the year, Amigo saw an uplift in requests for breathing space from customers. On 31 March 2020 our Covid-19 relief measures were formally introduced; for customers that request it, depending on their individual circumstances, a payment holiday between one and six months has been offered. We note that the granting of a payment holiday does not automatically indicate a significant increase in credit risk (SICR) in this unprecedented Covid-19 scenario; multiple variables have been considered on an individual customer basis to determine if a SICR event has occurred. The treatment of those customers within our IFRS 9 modelling has involved significant accounting judgements and has involved detailed analysis of historic behaviour of that customer, considering both previous payment plans and the number of times that the loan has fallen into arrears. Following this analysis performed on an individual account basis, a stage 1 to stage 2 uplift overlay has been applied to our IFRS 9 model.

In addition to the staging overlay, new macroeconomic assumptions have been applied to our IFRS 9 model in which several scenarios with varying severities and durations of the Covid-19 pandemic have been considered and probability weighted. The key judgement of how to probability weight each scenario is discussed in further detail in note 2 to the financial statements.

In the year, the model Amigo used for IFRS 9 calculations has been refined and improved, resulting in a shift in the staging distribution of the provision; more details on the key judgements and estimates within the model and sensitivity analysis are in note 2.

Earlier in the period, and prior to the impact of Covid-19, resource constraints within our Collections department were a key driver in the increase of our impairment provision. Amigo invested in both its workforce and processes to address this issue, with average headcount increasing from 303 to 405 year on year. We continue to direct more resource into our Collections team with the benefit of recent recruitment and internal redeployment reducing reliance on third-party outsourcing.

We have an impairment provision of £106.8m at year end, which is over two times the balance of receivables which are 60 days past due or more, being £42.0m (2019: £29.8m). The proportion of receivables which are current or less than 31 days past due remains within our expectations at 92.1% (2019: 94.6%) as at 31 March 2020.

One of our key performance indicators is the impairment:revenue ratio; this was 38.5% for the financial year (2019: 23.7%). The impairment expense disclosed in the consolidated statement of comprehensive income includes the positive impact of the recovery of written-off debt, primarily via debt sales, totalling £9.8m (2019: £3.1m). We will continue to pursue debt sale arrangements with FCA authorised third parties.

Cost management

Operating cost:income ratio represents operating costs exclusive of complaints expense as a percentage of revenue; for the financial year this is 20.2%, up from 17.5% in the prior year. This increase reflects investments made to improve the customer journey and provide positive customer outcomes. As can be seen in note 6 of the financial statements, increased spend on employee costs and legal and professional fees were partially offset by reductions in advertising and marketing spend and print, post and stationery costs. Other costs have increased largely due to increased licensing, IT, charitable donation, outsourced call centre costs and a rise in broker costs unattributable to individual loans. 

Our overall average headcount rose from 303 to 405 over the financial year in line with initiatives to address resource constraints within the Complaints and Collections departments and to build appropriately sized support teams allowing Amigo to meet all expectations and deliverables required by a listed group.

Overall, our simple business model, our online customer journey and our technology allow us to have a very low operating cost:income ratio (excluding complaints) despite ongoing challenges.

Loss after tax

Our statutory loss after tax was £27.2m, compared to a prior year profit after tax of £88.6m. This decline in profitability is driven by the recognition of a complaints provision and increased impairment provisioning in the year. Adjusting our statutory loss after tax for: (a) senior secured note buyback-related costs; (b) RCF fee write off; (c) strategic review and formal sale process (FSP) related costs; and (d) a release of a tax provision gives us our adjusted loss after tax of £26.9m, which is 126.9% lower than the prior year adjusted profit after tax (2019: £100.1m). Excluding the impact of complaints, statutory profit after tax would be £75.5m (a 14.8% decrease on prior year) and adjusted profit after tax would be £75.8m (a 24.4% decrease).

Reported loss/profit after tax to adjusted loss/profit after tax reconciliation (£m)

Our adjusted return on equity for the financial year was negative 13.1% (2019: 45.6%). This is defined as adjusted loss/profit after tax over average adjusted tangible equity. Statutory loss/profit after tax over tangible equity was negative 16.3% for the financial year (2019: 36.2%).

Our adjusted return on assets was negative 3.6% after tax (compared to 14.0% in the prior year). This is defined as adjusted loss/profit after tax over average revenue-generating assets in the year (being customer loans, other receivables and cash).

Explanations of all adjustments are detailed in the APMs section of the financial statements.

Cash flows and liquidity

Adjusted free cash flow is defined as collections less non-direct costs (being operating expenses not relating to exceptional items, complaints or cost of acquisition). We generated £554.5m in free cash flow in the last financial year (2019: £515.7m), which is equivalent to 1.6x current year originations of £347.4m (2019: 1.1x) and 1.2x current borrowings at year end (2019: 1.2x). Total cash collections were £594.0m versus £543.5m in the prior year. Statutory net cash from operating activities was £122.0m in the year (2019: (£5.4m) cash used). The Group has maintained its strict capital management processes and has continued to invest in its people, processes, marketing and infrastructure whilst also continually monitoring cash versus borrowing levels.

At the year end, Amigo held £64.3m in cash and cash equivalents (2019: £15.2m) following cash retention initiatives implemented during the Covid-19 outbreak, put in place to lower reliance on external funding providers and to cover future operating costs and originations when the pause on new lending is lifted in the future. Whilst originations are paused, the business continues to be highly cash generative as demonstrated by the positive cash flows built up throughout Q4 and post year end, with over £135.0m of unrestricted cash held at 30 June 2020.

Gearing

Net borrowings/adjusted tangible equity, the Group's measure used to monitor gearing, has increased to 2.4x (2019: 1.9x), due to the reduction in equity following the recognition of a complaints provision in the year. Despite the increase, the Group's gearing is low and in-line with pre-IPO levels.

Dividends and loss/earnings per share

Our adjusted basic loss/earnings per share for the year was a loss of 5.7p, down 125.9% year on year, whilst basic loss/earnings per share decreased 129.4% year on year to a loss per share of 5.7p.

The Group enforces a disciplined capital management process around dividend approval. We paid an interim dividend of 3.1p per share in January 2020. In Q3 we withdrew our guidance around dividends and post year end confirmed following the Covid-19 outbreak and increased complaints provision that no final dividend is being proposed for the year ended 31 March 2020. This gives a total full year dividend of 3.1p.

Summary

This has been a year of significant challenge for Amigo, with numerous unprecedented events crystallising throughout the year including but not limited to a change in relending policy, the commencement of a strategic review, the announcement, progression and termination of a formal sale process, an evolution in the FOS' approach to complaints and a global pandemic. Following the year end, we entered into a Voluntary Requirement with the FCA to clear a backlog of complaints by the end of October 2020. The increase in complaint volumes has led to a material rise in the year-end complaints provision. On 29 May 2020 the FCA commenced an investigation into whether or not Amigo's creditworthiness assessment process, and the governance and oversight of this, was compliant with regulatory requirements. The FCA investigation will cover the period from 1 November 2018 to date.

The Covid-19 situation evolves daily; we will continue to monitor the macroenvironment and government announcements when considering when to lift our temporary pause on new lending. For now, we continue to operate mostly from home, prioritising continuing support of our existing customers.

Despite the in-year challenges, our liquidity remains adequate, with over £135.0m in unrestricted cash held at 30 June 2020. Throughout the first fiscal quarter of 2021, Amigo granted Covid-19 related payment holidays to approximately 47,000 customers; despite this, cash collections remained strong at 87% of pre-Covid-19 forecast projections. High cash collections were driven in part by operational redeployment to the Collections team whilst originations are temporarily paused, and also by an increase in early settlements. Gearing remains low despite the recognition of a complaints provision in the year; in line with pre-IPO levels, net borrowings/adjusted tangible equity was 2.4x at 31 March 2020. It is considered we have adequate liquidity to continue to support the ongoing business activity; however, the unquantifiable and unpredictable potential impact of the FCA investigation, Covid-19 impact on the economy and the level of complaints have led to a material uncertainty surrounding going concern. ​​​​​

We are mindful of the evolving regulatory environment and will continue to work extremely closely with our regulators, the FCA, and the FOS to ensure our conduct framework and supporting systems and processes remain compliant. In this time of uncertainty, Amigo retains its core belief and business goal of providing financial inclusion to all, providing our customers with the financial support they need that might not be offered to them by mainstream lenders. We are committed to developing a new business which is sustainable in the long term, while addressing the challenges we have in the back book.

The most important asset we have is our people. The versatile and committed Amigo workforce has shown true grit throughout all of the changes and continues to put our customers at the heart of everything we do in order to provide them with the best possible outcomes.

Nayan Kisnadwala

Chief Financial Officer

20 July 2020

Consolidated statement of comprehensive income

for the year ended 31 March 2020

The (loss)/profit is derived from continuing activities.

The accompanying notes form part of these financial statements.

1 This line item includes reversals of impairment losses or impairment gains, determined in accordance with IFRS 9. In the year, this totalled £9.8m (2019: £3.1m) predominantly due to the positive impact of debt sales.

2 There was less than £0.1m of other comprehensive income during any period, and hence no consolidated statement of other comprehensive income is presented.

3. Total cost of dividends paid in the period was £50.1m (FY19: £8.9m). Final dividends are recognised on the earlier of their approval or their payment. Interim dividends are recognised on their payment date. The payments include a final dividend of 7.45p for FY19 approved at the Annual General Meeting (AGM) on 12 July 2019. Dividend per share for the year ended 31 March 2020 includes the prior year final dividend (7.45p), but also the current period interim dividend (3.10p), approved by the Board on 27 November 2019 for payment on 31 January 2020. The Board has decided that it will not propose a final dividend payment for the year ended 31 March 2020. 

Consolidated statement of financial position

as at 31 March 2020

The accompanying notes form part of these financial statements.

The financial statements of Amigo Holdings PLC were approved and authorised for issue by the Board and were signed on its behalf by:

Nayan Kisnadwala Date: 20 July 2020

Director

Company no. 10024479

Consolidated statement of changes in equity

for the year ended 31 March 2020

The accompanying notes form part of these financial statements.

1 The merger reserve was created as a result of a Group reorganisation in 2017 to create an appropriate holding company structure. The restructure was within a wholly owned group, constituting a common control transaction.

2 IFRS 9 was adopted on 1 April 2018; comparatives have not been restated

3 On 4 July 2018, shareholder loan notes held were converted to equity upon the listing of the Group

4 On 1 April 2019, the Group adopted IFRS 16. A right-of-use asset of £0.6m and a lease liability of £0.9m were recognised as a result on 1 April 2019, with the balancing amount being taken to retained earnings.

Consolidated statement of cash flows

for the year ended 31 March 2020

The accompanying notes form part of these financial statements.

1 The IPO is not included in financing activities (as no new capital was raised). IPO and related financing costs are included within operating cash flows; see note 7 for detail. On 4 July 2018 the Company's shares were admitted to trading on the London Stock Exchange. Immediately prior to admission the shareholder loan notes were converted to equity increasing the share capital of the business to 475 million ordinary shares and increasing net assets by £207.2m. No additional shares were issued subsequent to conversion of the shareholder loan notes. There were no cash transactions involved in this conversion - all related transaction costs are immaterial. 

Notes to the consolidated financial statements

for the year ended 31 March 2020

1. Accounting policies

1.1 Basis of preparation of financial statements

Amigo Holdings PLC is a public company limited by shares (following IPO on 4 July 2018), listed on the London Stock Exchange (LSE: AMGO). The Company is incorporated and domiciled in England and Wales and its registered office is Nova Building, 118-128 Commercial Road, Bournemouth, United Kingdom BH2 5LT.

The principal activity of the Company is to act as a holding company for the Amigo Loans Group of companies. The "principal" activity of the Amigo Loans Group is to provide individuals with guarantor loans from £1,000 to £10,000 over one to five years.

The consolidated and Company financial statements have been prepared on a going concern basis and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (EU-IFRS) and with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

The consolidated financial statements have been prepared under the historical cost convention, except for financial instruments measured at amortised cost or fair value.

The presentational currency of the Group is GBP, the functional currency of the Company is GBP and these financial statements are presented in GBP. All values are stated in £ million (£m) except where otherwise stated.

In preparing the financial statements, the Directors are required to use certain critical accounting estimates and are required to exercise judgement in the application of the Group and Company's accounting policies. See note 2 for further details.

The consolidated Group and Company financial statements for the year ended 31 March 2020 were approved by the Board of Directors on 20 July 2020.

The Group's principal accounting policies under EU-IFRS, which have been consistently applied to all years presented unless otherwise stated, are set out below.

The financial information for the year ended 31 March 2019 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under s498(2) or (3) of the Companies Act 2006.

The statutory financial statements for the year ended 31 March 2020 will be filed with the Registrar of Companies following the 2020 Annual General Meeting. The report of the auditor was unqualified and did not contain a statement under s498(2) or (3) of the Companies Act 2006, but did include a section highlighting a material uncertainty that may cast significant doubt on the Group and Company's ability to continue as a going concern.

Going concern

The Directors have made an assessment in preparing these financial statements as to whether the Group and Company are a going concern. The financial statements have been prepared on a going concern basis which the Directors consider to be appropriate for the following reasons.

The Group meets its funding requirements through:

· cash generated from operations and the existing loan book is expected to continue to generate cash inflows in the normal course of business. In response to the Covid-19 pandemic, all new lending, except to key workers, was paused in March 2020;

· a £300m securitisation facility which expires in June 2022, after which the drawn balance will amortise in line with the repayment of the underlying securitised agreements. On 24 April 2020 the Directors negotiated a three month waiver period for the facility. The terms of the waiver period amendment remove the obligation of the lender to make any further advances to the Group but also provide the Group with a waiver from an early amortisation event should an asset performance trigger threshold be breached during the period. The terms of the amendment also require that the facility must be restructured to the satisfaction of the lender by the end of the waiver period (24 July 2020 or such other date agreed to by the lender) or the facility will be placed into early amortisation, after which, the performance covenants no longer apply; and

· senior secured notes of £234.1m which expire in January 2024. The notes have no financial maintenance covenants.

The Group has an unrestricted cash balance of over £135m as at 30 June 2020. The Directors have prepared a base case cash flow forecast which covers a period of more than twelve months from the date of approval of these financial statements. This base case assumes:

· no material new lending for the duration of the forecast period;

· the securitisation facility enters early amortisation on the assumption that Group is unable to restructure the facility to the satisfaction of the lender at the end of the waiver period;

· complaints redress is settled in line with the expectations of the 31 March 2020 balance sheet provision (refer to note 18 to the financial statements);

· credit losses, and therefore customer collections, remain consistent with the expectations of the year-end impairment provision (refer to note 13 to the financial statements);

· a lower cost base than the financial year ended 31 March 2020, which would be achieved through a combination of lower variable costs and targeted cost saving initiatives to re-align the cost base to the re-based business; and

· no dividend payments during the forecast period.

This base case indicates that the Group and Company will have sufficient funds to enable it to operate within its available facilities and settle its liabilities as they fall due for at least the next twelve months.

The Directors have prepared a severe but plausible downside scenario covering the same forecast period, being at least the next twelve months from date of approval of these financial statements, which includes sensitivities that consider the potential impact of:

· increased credit losses as a result of a deterioration in the macroeconomic outlook due to Covid-19 and the inability of an increased number of Amigo's customers to continue to make payments. This sensitivity is broadly aligned to Amigo's worst case IFRS 9 macroeconomic scenario (see note 2.1.3 to the financial statements); and

· a sustained high volume of customer complaints throughout the forecast period coupled with an increase in the uphold rate.

This downside scenario also assumes that new lending remains materially paused throughout the forecast period. The downside scenario indicates that the Group should have sufficient funds to enable it to operate within its available facilities and settle its liabilities as they fall due in the next twelve months, excluding any negative impact from the FCA investigation discussed below.

However, the assumed high level of customer complaints redress throughout the forecast period would significantly reduce available liquidity headroom. If complaints redress were to continue at the same high levels assumed in the downside scenario beyond the next twelve months, the Group would need to source additional financing to maintain adequate liquidity and continue to operate.

In June 2020, the Financial Conduct Authority ("FCA") launched an investigation into the Group's creditworthiness assessment process, and the governance and oversight of this process. This investigation will cover the period from 1 November 2018 to date. Such investigations can take up to two years to finalise but could be concluded on within the next twelve months. There are a number of potential outcomes which may result from this FCA investigation, including the imposition of a significant fine and/or the requirement to perform a mandatory back-book remediation exercise. The Directors consider a mandatory back-book remediation exercise to be a possible outcome, but not the most likely outcome. The Directors consider should they be required to perform a back-book remediation exercise it could reasonably be expected to exhaust the Group's available liquid resources.

Based on these indications the Directors believe that it remains appropriate to prepare the financial statements on a going concern basis. However, these circumstances represent a material uncertainty that may cast significant doubt on the Group and Company's ability to continue as a going concern and, therefore, to continue realising its assets and discharging its liabilities in the normal course of business. The financial statements do not include any adjustments that would result from the basis of preparation being inappropriate.

Basis of consolidation

The consolidated income statement, consolidated statement of comprehensive income, balance sheet, statement of changes in shareholders' equity, statement of cash flows and notes to the financial statements include the financial statements of the Company and all of its subsidiary undertakings inclusive of structured entities (SEs); see note 27 for full list of subsidiaries and SEs. Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns through its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

The Group's securitisation facility was established in November 2018 and was subsequently upsized to a £200m facility in December 2018 and then to £300m in June 2019. The structured entity AMGO Funding (No. 1) Ltd was set up in this process; the Group has both power and control over that structured entity, as well as exposure to variable returns from the special purpose vehicle (SPV); hence, this is included in the consolidated financial statements. SEs are fully consolidated based on the power of the Group to direct relevant activities, and its exposure to the variable returns of the SE. In assessing whether the Group controls a SE, judgement is exercised to determine the following: whether the activities of the SE are being conducted on behalf of the Group to obtain benefits from the SE's operation; whether the Group has the decision-making powers to control or to obtain control of the SE or its assets; whether the Group is exposed to the variable returns from the SE's activities; and whether the Group is able to use its power to affect the amount of returns. The Group's involvement with SEs is detailed in note 24.

Intra-group sales and profits are eliminated fully on consolidation. The financial statements of the Group's subsidiaries (including SEs that the Group consolidates) are prepared for the same reporting period as the Company using consistent accounting policies.

1.2 New and amended standards adopted by the Group and Company

IFRS 8 Operating Segments

This is the first year the Group has made disclosures under IFRS 8 Operating Segments due to its Irish operations being immaterial in the prior year. An operating segment, as defined by IFRS 8 Operating Segments, is a component of the Group that engages in business activities from which it may earn revenues and incur expenses. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker as required by IFRS 8 Operating Segments. The chief operating decision maker responsible for allocating resources and assessing performance of the operating segments has been identified as the Group Executive Committee (ExCo). The accounting policies of the reportable segments are consistent with the accounting policies of the Group as a whole. An operating segment's operating results are reviewed regularly by the ExCo to make decisions about resources to be allocated to the segment and assess its performance. When assessing segment performance and considering the allocation of resources, the ExCo reviews information about segment assets and liabilities (with particular focus on segment net loan book and borrowings), as well as segment revenues and profits. See note 3 for more details.

IFRS 16 Leases

During the period IFRS 16 Leases, a new accounting standard introducing a single lessee accounting model (replacing IAS 17 Leases), was adopted by the Group. It became effective on 1 January 2019 and therefore is mandatory for the first time for the year ended 31 March 2020. The change did not have a material impact on the Group's net cash flows, financial position, total comprehensive income or earnings per share; however, the 2020 and 2019 results are not strictly comparable as from 1 April 2019 the Group adopted the standard. As permitted by IFRS 16, the Group has applied IFRS 16 using the modified retrospective approach, without restatement of the comparative information.

It introduces significant changes to lessee accounting, removing the distinction between operating and finance leases, replacing it with a model where a right-of-use asset and a corresponding liability are recognised for all leases where the Group is the lessee, except for short-term assets and leases of low-value assets. The change in definition of a lease mainly relates to the concept of control. IFRS 16 distinguishes between leases and service contracts on the basis of whether the use of an identified asset is controlled by the customer. Control is considered to exist if the customer has:

• the right to obtain substantially all of the economic benefits from the use of an identified asset; and

• the right to direct the use of that asset.

The new definition in IFRS 16 does not change the scope of contracts that meet the definition of a lease for the Group or have a material impact on the consolidated financial statements of the Group. IFRS 16 changed how the Group accounted for leases previously classified as operating leases under IAS 17, which were off balance sheet.

The key changes to the Group's accounting policies resulting from the adoption of IFRS 16 are summarised below.

i) Lease liability

All leases for a lessee, other than those that are less than twelve months in duration or are low value which the Group has elected to treat as exempt, require a lease liability to be recognised on the balance sheet on origination of the lease. The lease liability is initially measured as the present value of the contractual lease payments payable over the lease term discounted at the rate implicit in the lease if that can be readily determined or, if that rate cannot be readily determined, the Group's incremental borrowing rate. Subsequently settled lease payments reduce the lease liability and an interest expense is recognised in the income statement as the discount is unwound. The lease liability is also adjusted for the impact of lease modifications. Each lease payment is allocated between payments of the principal element of the lease liability and interest payments within the consolidated statement of cash flows.

ii) Right-of-use asset

For each lease liability a corresponding right-of-use asset is recorded in the balance sheet.

The right-of-use asset is initially measured at cost and subsequently measured at cost less accumulated amortisation and impairment losses, adjusted for any remeasurement of the lease liability. The right-of-use asset is subsequently depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis and recorded as an expense in other operating expenses. All of the Group's right-of-use assets at transition relate to the property lease of the main Amigo office in Bournemouth, the useful life on transition of which was between four and five years. Following transition, a second office was opened in Bournemouth which has also been accounted for under IFRS 16.

Under IFRS 16 interest expense on the lease liability is to be presented as a finance cost and the depreciation charge for the right-of-use asset is presented under administrative expenses. The classification of cash flows is affected as under IAS 17 operating lease payments were presented as operating cash flows, whereas under IFRS 16, the lease payments will be split into principal and interest portions which are presented as operating and financing cash flows respectively. Under IFRS 16, right-of-use assets are tested for impairment in accordance with IAS 36 Impairment of Assets. For short-term leases (lease term of twelve months or less), the Group opts to recognise a lease expense on a straight-line basis as permitted by IFRS 16.

Transition to IFRS 16

On transition to IFRS 16 the Group elected to apply the modified retrospective approach and has adopted the following permitted practical expedients:

• not to reassess whether a contract is or contains a lease. The definition of a lease in accordance with IAS 17 will continue to be applied to those contracts entered or modified before 1 January 2019;

• exclusion of initial direct costs from the measurement of the right-of-use asset at the date of adoption;

• for short-term and low value leases, lease payments continue to be recognised in the consolidated statement of comprehensive income on a straight-line basis over the lease term;

• the use of hindsight in determining the lease term if the contract contains an option to extend or terminate the lease; and

• to apply a single discount rate to a portfolio of leases with reasonably similar characteristics.

On adoption of IFRS 16, the Group recognised lease liabilities in relation to its property leases which had previously been classified as operating leases under IAS 17. These lease liabilities were measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate as of 1 April 2019. The weighted average incremental borrowing rate applied to the Group's leases on transition was 4.25%. In line with the transition options of IFRS 16, the associated right-of-use assets were measured as if IFRS 16 had always been applied to the lease but adjusted for accrued or prepaid lease-related expenses recognised on the balance sheet as at 31 March 2019. The Group's transition to IFRS 16 resulted in an opening reserves adjustment of £0.3m which has been recognised in retained earnings as at 1 April 2019. The following table shows the impact of transition to IFRS 16 on the balance sheet position as at 1 April 2019.

Financial impact

The application of IFRS 16 to leases previously classified as operating leases under IAS 17 resulted in the recognition of a right-of-use asset and a lease liability. The Group has chosen to use the table below to set out the adjustments recognised at the date of initial application of IFRS 16:

The table below presents a reconciliation from operating lease commitments disclosed at 31 March 2019 to lease liabilities recognised at 1 April 2019:

Following transition, an additional Amigo office has been opened in Bournemouth, with a right-of-use asset and lease liability of £0.7m (see note 19) being recognised respectively in November 2019.

There have been no other new or amended standards adopted in the financial year beginning 1 April 2019 which had a material impact on the Group or Company.

1.3 Amounts receivable from customers

i) Classification

IFRS 9 requires a classification and measurement approach for financial assets which reflects how the assets are managed and their cash flow characteristics. IFRS 9 includes three classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit and loss (FVTPL). Note, the Group does not hold any financial assets that are equity investments; hence the below considerations of classification and measurement only apply to financial assets that are debt instruments. A financial asset is measured at amortised cost if it meets both of the following conditions (and is not designated as at FVTPL):

· it is held within a business model whose objective is to hold assets to collect contractual cash flows; and

· its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

Business model assessment

In the assessment of the objective of a business model, the information considered includes:

• the stated policies and objectives for the loan book and the operation of those policies in practice, in particular whether management's strategy focuses on earning contractual interest revenue, maintaining a particular interest rate profile, matching the duration of the financial assets to the duration of the liabilities that are funding those assets or realising cash flows through the sale of the assets;

• how the performance of the loan book is evaluated and reported to the Group's management;

• the risks that affect the performance of the business model (and the financial assets held within that business model) and its strategy for how those risks are managed;

• how managers of the business are compensated (e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected); and

• the frequency, volume and timing of debt sales in prior periods, the reasons for such sales and the Group's expectations about future sales activity. However, information about sales activity is not considered in isolation, but as part of an overall assessment of how the Group's stated objective for managing the financial assets is achieved and how cash flows are realised.

The Group's business comprises primarily loans to customers that are held for collecting contractual cash flows. Debt sales of charged off assets are not indicative of the overall business model of the Group. The business model's main objective is to hold assets to collect contractual cash flows.

Assessment of whether contractual cash flows are solely payments of principal and interest

For the purposes of this assessment, "principal" is defined as the fair value of the financial asset on initial recognition. "Interest" is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time, as well as profit margin.

In assessing whether the contractual cash flows are solely payments of principal and interest (SPPI), the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. The Group has deemed that the contractual cash flows are SPPI and hence, loans to customers are measured at amortised cost under IFRS 9.

ii) Impairment

IFRS 9 includes a forward-looking "expected credit loss" (ECL) model in regards to impairment. IFRS 9 requires an impairment provision to be recognised on origination of a financial asset. Under IFRS 9, a provision is made against all stage 1 (defined below) financial assets to reflect the expected credit losses from default events within the next twelve months. The application of lifetime expected credit losses to assets which have experienced a significant increase in credit risk results in an uplift to the impairment provision.

iii) Measurement of ECLs

Under IFRS 9 financial assets fall into one of three categories:

Stage 1 - Financial assets which have not experienced a "significant" increase in credit risk since initial recognition;

Stage 2 - Financial assets that are considered to have experienced a "significant" increase in credit risk since initial recognition; and

Stage 3 - Financial assets which are in default or otherwise credit impaired.

Loss allowances for stage 1 financial assets are based on twelve month ECLs, that is the portion of ECLs that result from default events that are estimated within twelve months of the reporting date and are recognised from the date of asset origination. Loss allowances for stage 2 and 3 financial assets are based on lifetime ECLs, which are the ECLs that result from all estimated default events over the expected life of a financial instrument.

In substance the borrower and the guarantor of each financial asset have equivalent responsibilities. Hence for each loan there are two obligors to which the entity has equal recourse. This dual borrower nature of the product is a key consideration in determining the staging and the recoverability of an asset.

The Group performs separate credit and affordability assessments on both the borrower and guarantor. After having passed an initial credit assessment, most borrowers and all guarantors are contacted by phone and each is assessed for their creditworthiness and ability to afford the loan. In addition, the guarantor's roles and responsibilities are clearly explained and recorded. This is to ensure that while the borrower is primarily responsible for making the repayments, both the borrower and the guarantor are clear about their obligations and are also capable of repaying the loan.

When a borrower misses a payment, both parties are kept informed regarding the remediation of the arrears.

If a missed payment is not remediated within a certain timeframe, collection efforts are automatically switched to the guarantor and if arrears are cleared the loan is considered performing.

The Covid-19 pandemic presents significant economic uncertainty. The Group assessed that its key sensitivity was in relation to expected credit losses on customer loans and receivables. Given the significant uncertainty around the duration and severity of the impact of the pandemic on the macroeconomy and in particular unemployment, a matrix of nine scenarios consisting of three durations (three, six and twelve months) and three severities (moderate, high and extremely high) has been modelled. Refer to note 2.1.1 for further detail on the judgements and estimates used in the measurement of the ECL.

iv) Assessment of significant change in risk (SICR)

In determining whether the credit risk (i.e. risk of default) of a financial instrument has increased significantly since initial recognition, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort, including both quantitative and qualitative information and analysis. The qualitative customer data used in this assessment is payment status flags, which occur in specific circumstances such as a short-term payment plan, breathing space or other indicators of a change in a customer's circumstances. See note 2.1.2 for details of how payment status flags are linked to staging, and judgements on what signifies a significant increase in credit risk.

The Group has offered payment holidays to customers in response to Covid-19. These measures were introduced on 31 March 2020. The granting of a payment holiday does not automatically trigger a significant increase in credit risk. Customers granted payment holidays are assessed for other indicators of SICR and their loans are classified as stage 2 if other indicators of a SICR are present. This is in line with guidance issued by the International Accounting Standards Board (IASB) and Prudential Regulation Authority (PRA) which noted that the extension of government-endorsed payment holidays to all borrowers in particular classes of financial instruments should not automatically result in all those instruments being considered to have suffered a significant increase in credit risk. See note 2.1.2 for further detail.

v) Derecognition

The Group offers, to certain borrowers, the option to top up existing loans subject to internal eligibility criteria. The Group pays out the difference between the customer's remaining outstanding balance and the new loan amount at the date of top-up. The Group considers a top-up to be a derecognition event for the purposes of IFRS 9 on the basis that a new contractual agreement is entered into by the customer replacing the legacy agreement. The borrower and guarantor are both fully underwritten at the point of top-up and the borrower may use a different guarantor from the original agreement when topping up.

vi) Modification

Aside from top-ups, no formal modifications are offered to customers. In some instances, forbearance measures are offered

to customers. These are not permanent measures; there are no changes to the customer's contract and the measures do

not meet derecognition or modification requirements.

vii) Definition of default

The Group considers an account to be in default if it is more than three contractual payments past due, i.e. greater than 61 days, which is a more prudent approach than the rebuttable presumption in IFRS 9 of 90 days and has been adopted to align with internal operational procedures. The Group reassesses the status of loans at each month end on a collective basis.

When the arrears status of an asset improves so that it no longer meets the default criteria for that portfolio, it is cured and transitions back from stage 3.

viii) Forbearance

Where the borrower indicates to the Group that they are unable to bring the account up to date, informal, temporary forbearance measures may be offered. There are no changes to the customer's contract at any stage. Therefore, these changes are neither modification nor derecognition events.

Depending on the forbearance measure offered, an operational flag will be added to the customer's account, which may indicate significant increase in credit risk and trigger movement of this balance from stage 1 to stage 2 in impairment calculation. See note 2.1.2 for further details.

1.4 Revenue

Revenue comprises interest income on amounts receivable from customers. Loans are initially measured at fair value (which is equal to cost at inception) plus directly attributable transaction costs, and are subsequently measured at amortised cost using the effective interest rate method. Revenue is presented net of amortised broker fees which are spread over the expected behavioural lifetime of the loan as part of the effective interest rate method (see note 2.2 for further details).

The effective interest rate (EIR) is the rate that discounts estimated future cash payments or receipts through the expected life of the financial instrument (or a shorter period where appropriate) to the net carrying value of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument and includes any fees or incremental costs that are directly attributable to the instrument, but not future credit losses.

1.5 Operating expenses

Operating expenses include all direct and indirect costs. Where loan origination and acquisition costs can be referenced directly back to individual transactions (e.g. broker costs), they are included in the effective interest rate in revenue and amortised over the behavioural life of the loan rather than recognised in full at the time of acquisition.

1.6 Interest payable and funding facilities

Interest payable and funding facility fees are charged to the consolidated statement of comprehensive income over the term of the debt using the effective interest rate method so that the amount charged is at a constant rate on the carrying amount. Issue costs are initially recognised as a reduction in the proceeds of the associated capital instruments and recognised over the behavioural life of the liability. Amortised facility fees are charged to the consolidated statement of comprehensive income over the term of the facility using the effective interest rate method. Non-utilisation fees are charged to the consolidated statement of comprehensive income as incurred.

Senior secured note premiums and discounts are part of the instrument's carrying amount and therefore are amortised over the expected life of the notes. Where senior secured notes are repurchased in the open market resulting in debt extinguishment, the difference between the carrying amount of the liability extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in the consolidated statement of comprehensive income.

Shareholder loan note interest is charged to the consolidated statement of comprehensive income as accrued and is shown separately on the face of the consolidated statement of comprehensive income due to its nature and size. The Directors feel that this presentation gives the user of these financial statements a clearer view of the different interest balances charged to the consolidated statement of comprehensive income. On 4 July 2018 the shareholder loan notes were converted to equity upon listing of the Group.

1.7 Dividends

Equity dividends payable are recognised when they become legally payable. Interim equity dividends are recognised when paid. Final equity dividends are recognised on the earlier of their approval or payment date.

1.8 Taxation

Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the consolidated statement of comprehensive income except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity.

1.8.1 Current tax

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the consolidated statement of financial position date, and any adjustment to tax payable in respect of previous years. Taxable profit differs from profit before taxation as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.

1.8.2 Deferred tax

Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilised. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the consolidated statement of financial position date.

1.9 Property, plant and equipment (PPE)

PPE is stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Where parts of an item of PPE have different useful lives, they are accounted for as separate items of property, plant and equipment. Repairs and maintenance are charged to the consolidated statement of comprehensive income during the period in which they are incurred.

Depreciation is charged to the consolidated statement of comprehensive income on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. The estimated useful lives are as follows:

• Leasehold improvements 10% straight line

• Fixtures and fittings 25% straight line

• Computer equipment 50% straight line

Depreciation methods, useful lives and residual values are reviewed, and adjusted if appropriate, at each consolidated statement of financial position date.

1.10 Intangible assets

Intangible assets are recognised at historical cost less accumulated amortisation and accumulated impairment losses. Intangible assets are amortised from the date they are available for use. Amortisation is charged to the consolidated statement of comprehensive income.

Acquired software costs incurred are capitalised and amortised on a straight-line basis over the anticipated useful life, which is normally four years.

Amortisation methods, useful lives and residual values are reviewed at each consolidated statement of financial position date.

1.11 Provisions 

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle that obligation and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the balance sheet date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. For more details see note 2.3 and note 18.

Contingent liabilities are possible obligations arising from past events, whose existence will be confirmed only by uncertain future events, or present obligations arising from past events that are not recognised because either an outflow of economic benefits is not probable or the amount of the obligation cannot be reliably measured. Contingent liabilities are not recognised in the balance sheet but information about them is disclosed unless the possibility of any economic outflow in relation to settlement is remote.

1.12 Financial instruments

The Group primarily enters into basic financial instruments transactions that result in the recognition of financial assets and liabilities, the most significant being amounts receivable from customers, senior secured notes in the form of high yield bonds, loans from banks and other third parties, and loans to related parties.

1.12.1 Financial assets

Other receivables relating to loans and amounts owed by parent and subsidiary undertakings are measured at transaction price, less any impairment. Loans receivable are measured initially at fair value plus transaction costs and are measured subsequently at amortised cost using the effective interest method, less any impairment. Loans and amounts owed by parent and subsidiary undertakings are unsecured, have no fixed repayment date and are repayable on demand and interest on such balances is accrued on an arm's length basis. The impact of ECLs on other receivables has been evaluated and it is immaterial.

Cash is represented by cash in hand and deposits with financial institutions repayable without penalty on notice of not more than 24 hours. Cash equivalents are highly liquid investments that mature in no more than three months from the date of acquisition and that are readily convertible to known amounts of cash with insignificant risk of change in value. The impact of ECLs on cash has been evaluated and it is immaterial.

c) Derivative assets

Derivative assets held for risk management purposes are recognised on a fair value through profit and loss (FVTPL) basis, with movement in fair value being included under interest expenses in the consolidated statement of comprehensive income.

d) Derecognition

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when:

• the rights to receive cash flows from the asset have expired; or

• the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a "pass-through" arrangement and either:

• the Group has transferred substantially all the risks and rewards of the asset; or 

• the Group has neither transferred nor retained substantially all the risks and rewards of the asset but has transferred control of the asset.

e) Write-off

Loans are written off the balance sheet when an account is six contractual payments past due, as at this point it is deemed that there is no reasonable expectation of recovery. When there is recovery on written-off debts or when cash is received from the third-party purchaser on the legal purchase date, recoveries are recognised in the income statement within the impairment charge.

For charged-off debts that are placed with a third party in exchange for a commission on recoveries, but are still legally owned by the Group, an asset has been recognised within other receivables, being the net present value of expected future cash flows, discounted at the effective interest rate of the initial loans. A corresponding liability for commission payments due to the third party is also recognised. The recognition of assets for post charge-off recoveries is recognised in the income statement within the impairment charge.

1.12.2 Financial liabilities

Debt instruments (other than those wholly repayable or receivable within one year), i.e. borrowings, are initially measured at fair value less transaction costs and subsequently at amortised cost using the effective interest method.

Debt instruments that are payable within one year, typically trade payables, are measured, initially and subsequently, at the undiscounted amount of the cash or other consideration expected to be paid or received. However, if the arrangements of a short-term instrument constitute a financing transaction, like the payment of a trade debt deferred beyond normal business terms or financed at a rate of interest that is not a market rate or in case of an outright short-term loan not at market rate, the financial liability is measured, initially, at the present value of the future cash flow discounted at a market rate of interest for a similar debt instrument and subsequently at amortised cost.

Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. See note 1.6 for details of treatment of premiums/discounts on borrowings.

Short-term payables are measured at the transaction price. Other financial liabilities, including bank loans, are measured initially at fair value, net of transaction costs, and are measured subsequently at amortised cost using the effective interest method.

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or has expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference between the carrying value of the original financial liability and the consideration paid is recognised in the consolidated statement of comprehensive income.

1.13 Shareholder loan notes

Shareholder loan note interest is charged to the consolidated statement of comprehensive income as accrued and is shown separately on the face of the consolidated statement of comprehensive income due to its nature and size.

Shareholder loan notes are initially measured at fair value less attributable transaction costs and subsequently at amortised cost using the effective interest method.

The financial liability of the shareholder loan notes is derecognised when the obligation under the liability is discharged. On 4 July 2018 the Company's shares were admitted to trading on the London Stock Exchange. Immediately prior to admission the shareholder loan notes were converted to equity, increasing the share capital of the business by 75,333,760 to 475,333,760 ordinary shares and increasing net assets by £207.2m.

1.14 Securitisation

The Group securitises its financial assets via the sale of these assets to a special purpose entity, which in turn issues securities to investors. All financial assets continue to be held on the Group's consolidated balance sheet, together with debt securities in issue recognised for the funding. Securitised loans are not derecognised for the purposes of IFRS 9 on the basis that the Group retains substantially all the risks and rewards of ownership. The Group benefits to the extent that the surplus income generated by the transferred assets exceeds the administration costs of the special purpose vehicle (SPV), the cost of funding the assets and the cost of any losses associated with the assets and the administration costs of servicing the assets. Risks retained include credit risk, repayment risk and late payment risk. See note 14 for further details.

1.15 Merger reserve

The merger reserve was created as a result of a Group reorganisation in 2017 to create an appropriate holding company structure. With the merger accounting method, the carrying values of the assets and liabilities of the parties to the combination are not required to be adjusted to fair value, although appropriate adjustments shall be made through equity to achieve uniformity of accounting policies in the combining entities. The restructure was within a wholly owned group, constituting a common control transaction.

1.16 Leases

The Group and Company assesses whether a contract contains a lease at inception of a contract. A right-of-use asset and a corresponding liability are recognised with respect to all lease arrangements where it is a lessee, except for short-term leases (leases with a lease term of twelve months or less) and leases of low-value assets. The right-of-use asset comprises the initial measurement of the corresponding lease liability and is subsequently measured at cost less accumulated depreciation and impairment losses. Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset.

For these leases, the lease payment is recognised within administrative and operating expenses on a straight-line basis over the lease term. The lease liability is initially measured at the present value of the lease payments at the commencement date, discounted using the incremental borrowing rate, as there is no rate implicit in the lease. This is defined as the rate of interest that the lessee would have to pay to borrow, over a similar term, and with similar security the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment.

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease, using the effective interest rate method, and reducing the carrying amount to reflect the lease payments made. The lease liability is remeasured whenever:

• the lease term has changed, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate; 

• the lease payments change due to changes in an index or rate, in which case the lease liability is remeasured by discounting the revised lease payments using the initial discount rate; and

• the lease contract is modified and the modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate.

The Group and Company did not make any material adjustments during the year.

The lease liability and right-of-use asset are presented as separate line items on the balance sheet. The interest on the lease and depreciation are charged to the income statement and presented within finance costs and administrative and operating costs respectively.

In the prior year under IAS 17 Leases, rental costs under operating leases were charged to the consolidated statement of comprehensive income on a straight-line basis over the term of the lease.

1.17 Foreign currency translation

Items included in the financial statements of each of the Group's subsidiaries are measured using the currency of the primary economic environment in which the subsidiary operates (the functional currency). The Group's subsidiaries primarily operate in the UK and Republic of Ireland, with Amigo Loans Ireland Limited's first loans paid out in February 2019. The consolidated and the Company financial statements are presented in Sterling, which is the Group and Company's presentational currency.

Transactions that are not denominated in the Group's presentational currency are recorded at an average exchange rate for the month. Monetary assets and liabilities denominated in foreign currencies are translated into the relevant presentational currency at the exchange rates prevailing at the balance sheet date. Differences arising on translation are charged or credited to the income statement.

1.18 Defined contribution pension scheme

The Group operates a defined contribution pension scheme. Contributions payable to the Group's pension scheme are charged to the income statement on an accruals basis.

1.19 Share-based payments

The Company grants options under employee savings-related share option schemes (typically referred to as Save As You Earn schemes (SAYE)) and makes awards under the Share Incentive Plans (SIP) and the Long Term Incentive Plans (LTIP). All of these plans are equity settled.

The fair value of the share plans is recognised as an expense over the expected vesting period with a corresponding entry to retained earnings, net of deferred tax. The fair value of the share plans is determined at the date of grant. Non-market-based vesting conditions (i.e. earnings per share and absolute total shareholder return targets) are taken into account in estimating the number of awards likely to vest, which is reviewed at each accounting date up to the vesting date, at which point the estimate is adjusted to reflect the actual awards issued.

The grant by the Company of options and awards over its equity instruments to the employees of subsidiary undertakings is treated as an investment in the Company's financial statements.

1.20 Items presented separately within the consolidated statement of comprehensive income

Complaints expense, shareholder loan notes and IPO, strategic review, formal sale process and related financing costs are presented separately on the face of the consolidated statement of comprehensive income. These are items that are unusual because of their size, nature or incidence and which the Directors consider should be disclosed separately to enable a full understanding of the Group's results.

2. Critical accounting assumptions and key sources of estimation uncertainty

Preparation of the financial statements requires management to make significant judgements and estimates. The items in the financial statements where these judgements and estimates have been made are:

Judgements

The preparation of the consolidated Group and Company Financial Statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and the reported amounts of income and expenses during the reporting period. The most significant uses of judgements and estimates are explained in more detail in the following sections:

IFRS 9 - measurement of ECLs

• Assessing whether the credit risk of an instrument has increased significantly since initial recognition (note 2.1.2).

• Definition of default is considered by the Group to be when an account is three contractual payments past due (note 1.3.vii).

• Multiple economic scenarios - the probability weighting of nine scenarios to the ECL calculation (note 2.1.3).

Provisions (note 2.3)

• Judgement is involved in determining whether a present constructive obligation exists and in estimating the probability, timing and amount of any outflows.

Going concern

• Judgement is applied in determining if there is a reasonable expectation that the Group adopts the going concern basis in preparing these financial statements (note 1.1).

Estimates

Areas which include a degree of estimation uncertainty are:

IFRS 9 - measurement of ECLs

• Adopting a collective basis for measurement in calculation of ECLs in IFRS 9 calculations (note 2.1.1).

• Probability of default (PD), exposure at default (EAD) and loss given default (LGD) (note 2.1.1).

• Forward-looking information incorporated into the measurement of ECLs (note 2.1.3).

• Incorporating a probability weighted estimate of external macroeconomic factors into the measurement of ECLs (note 2.1.3).

Provisions (note 2.3)

• Calculation of provisions involves management's best estimate of expected future outflows, the calculation of which evaluates current and historical data, and assumptions and expectations of future outcomes.

Effective interest rate (note 2.2)

• Calculation of the effective interest rate includes estimation of the average behavioural life of the loans and the profile of the loan payments over this period (note 2.2).

2.1 Credit impairment

2.1.1 Measurement of ECLs

The Group has adopted a collective basis of measurement for calculating ECLs. The loan book is divided into portfolios of assets with shared risk characteristics including whether the loan is new business, repeat lending or part of a lending pilot as well as considering if the customer is a homeowner or not. These portfolios of assets are further divided by contractual term and monthly origination vintages.

During the year, the Group updated the IFRS 9 methodology to incorporate the additional historic loss experience and refined the approach to calculating ECLs. The updated methodology represents a change in accounting estimate. The allowance for ECLs is calculated using three components: a probability of default (PD), a loss given default (LGD) and the exposure at default (EAD). The ECL is calculated by multiplying the PD (twelve month or lifetime depending on the staging of the loan), LGD and EAD.

The twelve month and lifetime PDs represent the probability of a default occurring over the next twelve months or the lifetime of the financial instruments, respectively, based on historical data and assumptions and expectations of future economic conditions.

EAD represents the expected balance at default, considering the repayment of principal and interest from the balance sheet date to the default date. LGD is an estimate of the loss arising in the case where a default occurs at a given time. It is based on the difference between the contractual cash flows due and those that the Group expects to receive.

The Group assesses the impact of forward-looking information on its measurement of ECLs. The Group has analysed the effect of a range of economic factors and identified the most significant macroeconomic factor that is likely to impact credit losses as the rate of unemployment. Given the significant uncertainty around the duration and severity of the Covid-19 pandemic on the macroeconomy and in particular unemployment a matrix of nine scenarios consisting of three durations (three, six and twelve months) and three severities (moderate, high and extremely high) has been modelled and probability weighted to determine the ECL provision (see note 2.1.3).

2.1.2 Assessment of significant increase in credit risk (SICR)

To determine whether there has been a significant increase in credit risk the following two step approach has been taken:

1) The primary indicator of whether a significant increase in credit risk has occurred for an asset is determined by considering the presence of certain payment status flags on the account, which is the Group's primary qualitative criteria considered in the assessment of whether there has been a significant increase in credit risk. If a relevant operational flag is deemed a trigger indicating the remaining lifetime probability of default has increased significantly, the Group considers the credit risk of an asset to have increased significantly since initial recognition. Examples of this include operational flags for specific circumstances such as a short-term payment plans and breathing space granted to customers.

2) As a backstop, the Group considers that a significant increase in credit risk occurs no later than when an asset is two contractual payments past due (equivalent to 30 days), which is aligned to the rebuttable presumption of more than 30 days past due. This is the primary quantitative information considered by the Group in significant increase in credit risk assessments.

The Group reassesses the flag status of all loans at each month end and remeasures the proportion of the book which has demonstrated a significant increase in credit risk based on the latest payment flag data. An account transitions from stage 2 to stage 1 immediately when a payment flag is removed from the account. Each quarter a flag governance meeting is held, to review operational changes which may impact the use of operational flags in the assessment of a significant increase in credit risk.

The Group has offered payment holidays to customers in response to Covid-19. In normal circumstances, a customer request for a payment holiday (i.e. breathing space) would trigger a SICR in line with the Group's payment status flag approach to staging. The granting of exceptional payment holidays in response to Covid-19 does not automatically trigger a significant increase in credit risk. As such, these customers are not being automatically moved to stage 2 and lifetime ECLs. Customers granted Covid-19 payment holidays are assessed for other potential indicators of SICR, which are incremental to the Group's existing staging flags. This assessment includes a historical review of the customer's payment performance and behaviours. Following this review, those customers that have been granted a Covid-19 payment holiday and are judged to have otherwise experienced a SICR are transitioned to stage 2.

2.1.3 Forward-looking information

The Group assesses the impact of forward-looking information on its measurement of ECLs. The Group has analysed the effect of a range of economic factors and identified the most significant macroeconomic factor that is likely to impact credit losses as the rate of unemployment.

The Group has modelled a range of economic shock scenarios to estimate the impact of a spike in unemployment as a result of the Covid-19 pandemic. In doing so, consideration has also been given to the potential impact of deep fiscal and monetary support measures that have been implemented by the government to support the economy during this time. This is aligned to the forecast of the Office of Budget Responsibility (OBR) which forecasts that a three month lockdown scenario where economic activity would gradually return to normal over the subsequent three months. Given the lack of reliable external information the range of scenarios will include a variety of both severities and durations which can then be probability weighted.

In response to the significant uncertainty around the duration and severity of Covid-19 on the macroeconomy a matrix of nine scenarios has been modelled. The probability weightings allocated to the nine scenarios are included in the table below. These scenarios are weighted according to management's judgement of each scenario's likelihood.

The severity of the economic shock has been estimated with reference to underlying expectations for customer payment behaviour for accounts which are up to date or one contractual payment past due. The moderate, high and extremely high severities represent increases of 25%, 50% and 100% respectively, in the propensity for these accounts to miss payments and fall into arrears for the full duration of the economic shock.

The following table details the absolute impact on the current ECL provision of £106.8m if each of the nine scenarios are given a probability weighting of 100%.

The table above demonstrates that in the first scenario with a moderate severity and an impact of an initial three month spike in the unemployment rate, the ECL provision would decrease by £8.6m. In the worst case scenario with the greatest severity of the increase in unemployment and assuming this deterioration continues for a duration of twelve months the ECL provision would increase by £47.4m. The scenarios above demonstrate a range of ECL provisions from £98.2m to £154.2m.

As with any economic forecasts, the projections and likelihoods of occurrence are subject to a high degree of inherent uncertainty and therefore the actual outcomes may be significantly different to those projected.

2.2 Effective interest rates

Revenue comprises interest income on amounts receivable from customers. Loans are initially measured at fair value (which is equal to cost at inception) plus directly attributable transaction costs and are subsequently measured at amortised cost using the effective interest rate method. Revenue is presented net of amortised broker fees which are capitalised and recognised over the expected behavioural life of the loan as part of the effective interest rate method. The key judgement applied in the effective interest rate calculation is the behavioural life of the loan.

The historical settlement profile of loans, which were initially acquired through third-party brokers, is used to estimate the average behavioural life of each monthly cohort of loans. Settlements include both early settlements and top-ups as they are considered derecognition events (see note 1.3v). The average behavioural life is then used to estimate the effective interest on broker originations and thus the amortisation profile of the deferred costs.

Broker costs are largely incurred as a percentage of amounts paid out and not as a fixed fee per loan. Therefore, in determining the settlement profile of historical cohorts, settlement rates are pay-out weighted to accurately match the value of deferred costs with the settlement of loans.

The following table details the movement in the year-end EIR asset when sensitivity analysis is performed. In the analysis, it has been assumed that the amortisation profile of the most recent origination vintages is applicable to all cohorts. These cohorts were largely originated following lending policy changes implemented from July 2019 onwards, leading to a reduction in repeat lending and therefore early settlement. Using this profile for all cohorts therefore leads to an increase in the year-end EIR asset value based on slower amortisation of amounts receivable from customers.

2.3 Provisions

Provisions included in the statement of financial position refers to a provision recognised for customer complaints. The provision represents an accounting estimate of the expected future outflows arising from customer-initiated complaints, using information available as at the date of signing these financial statements (see note 18 for further detail).

Identifying whether a present obligation exists and estimating the probability, timing, nature and quantum of the redress payments that may arise from past events requires judgements to be made on the specific facts and circumstances relating to the individual complaints. Management evaluates on an ongoing basis whether complaints provisions should be recognised, revising previous judgements and estimates as appropriate; however, there can remain a wide range of possible outcomes and uncertainties.

The key assumptions in these calculations which involve significant, complex management judgement and estimation relate primarily to the projected costs of potential future complaints where it is considered likely that customer redress will be appropriate. These key assumptions are:

• Future estimated volumes - estimates of future volumes of customer-initiated and claims management company (CMC) raised complaints.

• Uphold rate (%) - the expected average uphold rate applied to future estimated volumes where it is considered more likely than not that customer redress will be appropriate.

• Average redress (£) - the estimated compensation, inclusive of balance adjustments and cash payments, for future upheld complaints included in the provision.

These assumptions remain subjective due to the uncertainty associated with future complaint volumes and the magnitude of redress which may be required. Complaint volumes may include complaints under review by the Financial Ombudsman Service, cases received from CMCs or cases directly from customers.

The provision is very sensitive to these assumptions, which means that the potential range of estimates is large. The selection of these assumptions is a significant estimate. Sensitivity analysis has therefore been performed on the complaints provision considering incremental changes in the key assumptions, should current estimates prove too high or too low. Sensitivities are modelled individually and not in combination.

1 Future estimated volumes. Sensitivity analysis shows the impact of a 20% change in the number of complaints on the provision.

2 Uphold rate. Sensitivity analysis shows the impact of a 10 percentage point change in the applied uphold rate on the provision.

3 Average redress. Sensitivity analysis shows the impact of a £500 change in average redress on the provision.

It is possible that the eventual outcome may differ materially from the current estimate (and the sensitivities provided above) and this could materially impact the financial statements as a whole, given the Group's only activity is guarantor-backed consumer credit. This is due to the risks and inherent uncertainties surrounding the assumptions used in the provision calculation. In particular, in the current estimate there is significant uncertainty around the impact of regulatory intervention, Financial Ombudsman actions and potential changes to remediation arising from continuous improvement of the Group's operational practices, which may have a material impact on the eventual volume and outcome of complaints. Therefore, although the directors believe the sensitivities presented above, both positive and negative, represent reasonably possible changes; there is a greater risk of a less favourable outcome to the Group.

The Group has disclosed a contingent liability with respect to the FCA investigation announced on the 29 May 2020. The investigation is with regards to Amigo's creditworthiness assessment process, and the governance and oversight of this, was compliant with regulatory requirements. The FCA investigation will cover lending for the period from 1 November 2018 to date. There is significant uncertainty around the impact of this on the business, the assumptions underlying the complaints provision and any future regulatory intervention. See note 18 for further details.

3. Segment reporting

At the beginning of 2019, the Group set up an operation in Ireland in order to lend to Irish customers. Prior to this, the Group did not have more than one operating segment. The Group now has two operating segments based on the geographical location of its operations, being the UK and Ireland. IFRS 8 requires segment reporting to be based on the internal financial information reported to the chief operating decision maker. The Group's chief operating decision maker is deemed to be the Group's Executive Committee (ExCo) whose primary responsibility is to support the Chief Executive Officer (CEO) in managing the Group's day-to-day operations and analyse trading performance. The Group's segments comprise Ireland (Amigo Loans Ireland Limited) and UK businesses (the rest of the Group). Below illustrates the segments reported in the Group's management accounts used by ExCo as the primary means for analysing trading performance. ExCo assesses net loan book and revenue performance.

The table below presents the Group's performance on a segmental basis for the year ended 31 March 2020 in line with reporting to the chief operating decision maker:

The carrying value of property, plant and equipment and intangible assets included in the statement of financial position materially all relates to the UK.

The results of each segment have been prepared using accounting policies consistent with those of the Group as a whole.

4. Revenue

Revenue consists of interest income and is derived primarily from a single segment in the UK, but also from Irish entity Amigo Loans Ireland Limited.

Other income includes non-complaints related refunds and income from courts. 

5. Interest payable and funding facility fees

Interest payable represents the total amount of interest expense calculated using the effective interest method for financial liabilities that are not treated as fair value through the profit or loss. Non-utilisation fees within this figure are immaterial. No interest was capitalised by the Group during the period.

Included within bank interest payable for the period is £2.2m of written-off fees. These were previously capitalised and were being spread over the expected life of the Group's prior revolving credit facility. Following substantial modification of the facility, these have been written off in full. Fees worth £0.7m were capitalised in relation to the modified facility. The revolving credit facility was cancelled in May 2020; hence, these fees will be written off to the consolidated statement of comprehensive income in the first quarter of the financial year ending 31 March 2021. Also included are the amortisation of the initial costs of the Group's securitisation and revolving credit facilities and their respective non-utilisation fees.

Funding facility fees include non-utilisation fees and amortisation of initial costs of the Group's senior secured notes.

6. Operating expenses

1 Other costs have increased largely due to a reduction in the effective interest rate (EIR) broker cost adjustment, and also increased licensing, IT, charitable donation and outsourced call centre costs.

2 Other assurance services include interim reviews of quarterly financial statements.

3 Services relating to corporate finance transactions include fees incurred as part of the IPO process.

4 Note: current year figures are in accordance with IFRS 16 Leases. Prior year figure under IAS 17 Leases have not been restated.

7. IPO, strategic review, formal sale process and related financing costs

IPO, strategic review, formal sale process and related financing costs are disclosed separately in the financial statements because the Directors consider it necessary to do so to provide further understanding of the financial performance of the Group. They are material items of expense that have been shown separately due to the significance of their nature and amount.

IPO and related financing costs relate to advisor, legal and financing fees in respect of the listing of the Group in July 2018. Included within these costs in the prior year was a £1.4m share-based payment expense. Strategic review and formal sale process costs relate to advisor and legal fees in respect of the strategic review and formal sale process announced on 27 January 2020.

8. Employees

The average monthly number of employees employed by the Group (including the Directors) during the year, analysed by category, was as follows:

Average headcount increased by 102 reflecting the Group's focus on both collections and complaints, as well as increasing the size of support teams to support operations of the business.

9. Key management remuneration

The remuneration of the Executive and Non-Executive Directors, who are the key management personnel of the Group, is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures.

During the year retirement benefits were accruing for two Directors (2019: three) in respect of defined contribution pension schemes. The share-based payment charge reflects the expected vesting of the Group's share-based incentives.

The highest paid Director in the current year received remuneration of £520,704 inclusive of national insurance payments (2019: £2,457,115 inclusive of national insurance payments).

In the prior year, the highest paid Director received remuneration of £2,457,115 inclusive of national insurance payments. Of this, £21,241 was in relation to payment in lieu of notice. £30,000 is in relation to payment for loss of office. This Director was in receipt of an equity settled share-based payment award in the year. In total the award amounted to £1.4m including social security costs.

The value of the Group's contributions paid to a defined contribution pension scheme in respect of the highest paid Director amounted to £2,580 due to an election being made for payment in lieu of pension (2019: £nil).

10. Taxation

The applicable corporation tax rate for the period to 31 March 2020 was 19.0% (2019: 19.0%) and the effective tax rate is (28.2)% (2019: 20.2%).

A reconciliation of the actual tax (credit)/charge, shown above, and the (loss)/profit before tax multiplied by the standard rate of tax, is as follows:

The UK corporation tax rate will remain at 19%.

11. Deferred tax

A deferred tax asset is recognised to the extent that it is expected that it will be recovered in the form of economic benefits that will flow to the Group in future periods. In recognising the asset, management judgement on the future profitability and any uncertainties surrounding the profitability is required to determine that future economic benefits will flow to the Group in which to recover the deferred tax asset that has been recognised. Further details of the assessment performed by management and the key factors included in this assessment can be found under the going concern considerations in note 1.1.

The deferred tax (liability)/asset is made up as follows:

1The deferred tax asset arises from balance sheet adjustments to restate the IAS 39 balance sheet onto an IFRS 9 basis, for which tax deductions are available over ten years.

12. Loss/earnings per share

Basic loss/earnings per share is calculated by dividing the loss/profit for the year attributable to equity shareholders by the weighted average number of ordinary shares outstanding during the year.

Diluted loss/profit per share calculates the effect on loss/profit per share assuming conversion of all dilutive potential ordinary shares. Dilutive potential ordinary shares are calculated as follows:

i) For share awards outstanding under performance-related share incentive plans such as the Share Incentive Plan (SIP) and the Long Term Incentive Plans (LTIPs), the number of dilutive potential ordinary shares is calculated based on the number of shares which would be issuable if: (i) the end of the reporting period is assumed to be the end of the schemes' performance period; and (ii) the performance targets have been met as at that date.

ii) For share options outstanding under non-performance-related schemes such as the Save As You Earn scheme (SAYE), a calculation is performed to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Company's shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated is compared with the number of share options outstanding, with the difference being the dilutive potential ordinary shares.

Potential ordinary shares are treated as dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share or increase loss per share.

1 Adjusted basic (loss)/earnings per share and earnings for adjusted basic (loss)/earnings per share are non-GAAP measures.

The Directors are of the opinion that the publication of the adjusted (loss)/earnings per share is useful as it gives a better indication of ongoing business performance.

Reconciliations of the loss/earnings used in the calculations are set out below. Note figures are presented net of tax:

1 Adjusted basic (loss)/earnings per share and earnings for adjusted basic (loss)/earnings per share are non-GAAP measures.

13. Customer loans and receivables

The table shows the gross loan book and deferred broker costs by stage, within the scope of the IFRS 9 ECL framework.

1 Deferred broker costs are recognised within customer loans and receivables and are amortised over the expected life of those assets using the effective interest rate (EIR) method.

As at 31 March 2020, £309.2m of loans to customers had their beneficial interest assigned to the Group's special purpose vehicle (SPV) entity, namely AMGO Funding (No. 1) Ltd, as collateral for securitisation transactions (2019: £197.0m). See note 24 for further details of this structured entity.

Ageing of gross loan book (excluding deferred brokers fees and provision) by days overdue:

The following table further explains changes in the gross carrying amount of loans receivable from customers to explain their significance to the changes in the loss allowance for the same portfolios.

As shown in the table above, the loan book inclusive of deferred broker cost decreased from £803.9m to £770.4m. This was primarily driven by the effect of passage of time, customer settlements and loans charged off being greater than net new receivables originated.

Upon revising the ECL model, the distribution between stages has changed significantly. The prior model used the collective estimated cash shortfalls for each credit risk portfolio based on forecast loss curves. Forecast loss curves were prepared on a risk segment basis for annual vintages and combine the Group's historical trends, current credit loss behaviour and management judgements. Recoveries were not factored into these loss curves.

The new probability of default (PD) methodology has increased the stage 1 provision as a result of the refined PD forecasting methodology. This is offset by a lower stage 2 and stage 3 provision owing to the inclusion of discounted recoveries factored into the LGD working.

The following tables explain the changes in the loan loss provision between the beginning and the end of the period:

As shown in the above tables, the allowance for ECL increased from £75.4m at 31 March 2019 to £106.8m at 31 March 2020.

The increase in the impairment provision was driven in part by the anticipated increase in future credit losses as a result of the Covid-19 pandemic and the deterioration in the macroeconomic outlook.

The following table splits the gross loan book by arrears status, and then by stage respectively for the year ended 31 March 2020.

The following table splits the gross loan book by arrears status, and then by stage respectively for the year ended 31 March 2019.

The following table further explains changes in the gross carrying amount of loans receivable from customers to explain their significance to the changes in the loss allowance for the same portfolios.

1 Deferred broker costs are recognised within customer loans and receivables and are amortised over the expected life of those assets using the effective interest rate (EIR) method. 

14. Financial instruments

The below tables show the carrying amounts and fair values of financial assets and financial liabilities, including the levels in the fair value hierarchy. All financial assets fall within the IFRS 9 category of amortised cost. The tables analyse financial instruments into a fair value hierarchy based on the valuation technique used to determine fair value:

a) Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.

b) Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

c) Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

1 The Group has disclosed the fair values of financial instruments such as short-term trade receivables and payables at their carrying value because it considers this a reasonable approximation of fair value.

2 The unobservable inputs in the fair value calculation of amounts receivable from customers are expected credit losses, forecast cash flows and discount rates.

3 Senior secured notes are presented in the financial statements net of unamortised fees. As at 31 March 2020, the gross principal amount outstanding was £234.1m.

Financial instruments not measured at fair value

The fair value of amounts receivable from customers has been estimated using a net present value calculation using discount rates derived from the blended effective interest rate of the instruments. As these loans are not traded on an active market and the fair value is therefore determined through future cash flows, they are classed as Level 3 under IFRS 13 Fair Value Measurement. The fair value of senior secured notes has been taken at the Bloomberg Valuation Service (BVAL) market price.

All financial instruments are held at amortised cost, with the exception of the derivative asset which is held at FVTPL.

The fair value of the securitisation facility is estimated using a net present value calculation using discount rates derived from contractual interest rates, with cash flows assuming no principal repayments until maturity date.

The Group's activities expose it to a variety of financial risks, which can be categorised as credit risk, liquidity risk, interest rate risk, foreign exchange rate risk and market risk. The objective of the Group's risk management framework is to identify and assess the risks facing the Group and to minimise the potential adverse effects of these risks on the Group's financial performance. Financial risk management is overseen by the Group Risk Committee.

Credit risk

Credit risk is the risk that the Group will suffer loss in the event of a default by a customer, a bank counterparty or the UK government. A default occurs when the customer or bank fails to honour repayments as they fall due.

a) Amounts receivable from customers

There is a limited concentration of risk to individual customers with an average customer balance outstanding of £3,378 (2019: £3,896). The carrying amount of the loans represents the Group's maximum exposure to credit risk.

The Group carries out an affordability assessment on both borrower and guarantor before a loan (or top-up) can be paid out. As a separate exercise using the knowledge and data from its 15 year presence in the guarantor loan sector, each potential loan undergoes a creditworthiness assessment based on the applicant's and guarantor's credit history. No formal collateral or guarantees are held against loans on the basis that the borrower and guarantor are technically and in substance joint borrowers.

The Group manages credit risk by actively managing the blend of risk in its portfolio to achieve the desired impairment rates in the long term. The Group aims to achieve the desired risk in the portfolio by managing its scorecards and the maximum amount borrowers are able to borrow depending on their circumstance and credit history. Factors considered in monitoring the overall impairment rates include the total value of the loan, the homeowner status of the guarantor, whether loans are new or repeat loans and whether these are lending pilot loans. Using the data and expected loss curves for the different scorecards the business can vary its origination levels to target an expected loss rate and impairment level and manage the consolidated statement of financial position risk.

Credit risk is also managed post origination via ongoing monitoring and collection activities. When payments are missed, regular communication with both the borrower and guarantor commences. After three days, a collection agent will engage with the borrower. The guarantor has the opportunity to pay from day one, but is actively approached for payment after 14 days. Should Amigo be unable to work with either the borrower or guarantor in considering potential payment plans, the account will then be passed onto the Group's Litigation team. Throughout this whole process, operational flags will be added to the account to allow monitoring of the status of the account. Operational flags are used within the Group's impairment model in the assessment of whether there has been a significant increase in credit risk on an account (see note 2.1.2 for further details).

Lending pilots are designed to test new criteria and relationships that allow the Group to lend to applicants who would have been rejected under the core scorecards. By their nature, credit loss history for each lending pilot is limited. The Group monitors performance to determine which pilots perform at an acceptable risk level over time, with a view to integrating successful pilots into core lending or alternatively rejecting them where performance of lending pilots is below the level required for the Group to meet its internal risk appetite.

The business monitors the proportion of the consolidated statement of financial position within the homeowner guarantor, non-homeowner guarantor and lending pilot categories. At 31 March 2020 and 31 March 2019, the mix of business within the categories was as follows:

In addition, should a customer enter into a repayment plan, the Group does not reschedule the terms for its internal reporting. Instead the business calculates the arrears level with reference to the original terms. At 31 March 2020, on a volume basis 0.86%, 4.27% and 0.16% of the gross loan book were on breathing space, long-term and short-term payment plans respectively (2019: 0.19%, 3.95% and 0.74%).

Originations relating to the circumstances monitored are as follows:

b) Bank counterparties

Counterparty credit risk arises as a result of cash deposits placed with banks and the use of derivative financial instruments with banks and other financial institutions which are used to hedge against interest rate risk.

This risk is managed by the Group's key management personnel. The Group is continually looking to diversify its sources of funding and obtains funding from high quality sources such as tier 1 bank institutions. Funding diversification has been demonstrated by the introduction of the securitisation facility in the prior financial year. Funding is from a variety of sources, so exposure to credit risk on bank counterparties is deemed to be low.

Securitisation vehicles

In the ordinary course of business, the Group enters into transactions that result in the transfer of the right to receive repayments in respect of loans and advances to customers to a securitisation vehicle. In accordance with the accounting policy set out in note 1.14, the transferred loans and advances to customers continue to be recognised in their entirety.

The Group transfers loans and advances to customers to a securitisation vehicle but retains substantially all the risks and rewards of ownership. The Group benefits to the extent that the surplus income generated by the transferred assets exceeds the administration costs of the special purpose vehicle (SPV), the cost of funding the assets and the cost of any losses associated with the assets and the administration costs of servicing the assets. Refer to note 24 for further details on the structure. Risks retained include credit risk, repayment risk and late payment risk.

The Group controls an entity when it is exposed to, or has rights to, variable returns through its involvement with the entity and has the ability to affect those returns through its power over the entity. The securitisation entity is an orphaned SPV under full control of the Group - returns are impacted by Group funding decisions, and variable returns are impacted by changes in the amount of receivables transferred to the orphaned entity, the amount borrowed, etc. Hence, control is held over the entity and the results are consolidated into the Group in full.

The following table shows the carrying value and fair value of the assets transferred to securitisation vehicles and the related carrying value and fair value of the associated liability. The difference between the value of assets and associated liabilities is primarily due to subordinated funding provided to the SPV. The collateral is not able to be sold or repurposed by the SPV; it can only be utilised to offset losses.

Market risk

Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk - interest rate risk, currency risk and other prices risk. The Group's exposure is primarily to the risk of changes in interest rates.

Interest rate risk

Interest rate risk is the risk of a change in external interest rates which leads to an increase in the Group's cost of borrowing. The Group seeks to limit the net exposure to changes in interest rates. This is achieved through a combination of issuing fixed-rate debt and by the use of derivative financial instruments.

The senior secured loan note liability is set at a fixed interest rate of 7.625%.

The bank facility interest rate is set at a margin of 2.9% plus LIBOR for utilised funds and a total charge of 1.16% for non-utilised funds. In the prior year margin was 3.5% and the non-utilisation fee was 1.4%; the terms were renegotiated on 17 May 2019. No funds were utilised at year end; hence, a 1% movement in LIBOR based on the funds utilised at the year end equates to an annual charge of £nil (2019: £50,000). On 27 May 2020, the RCF was cancelled.

The securitisation facility is comprised of two notes with interest rates of 1.55% and 2.55% respectively over LIBOR. These blend to a rate of 1.6% over LIBOR (2019: 1.6% over LIBOR). A 1% increase in LIBOR based on the funds utilised at the year end (£231.7m) equates to an annual charge of £2.3m (2019: £1.6m).

In aggregate, a 1% increase in LIBOR would equate to an annual charge of £2.3m based on year-end borrowings (2019: £1.6m).

Whilst variable rates are subject to change without notice, the Group has managed this risk through the use of a derivative asset which caps the LIBOR at 4.222%. This remains significantly below the remainder of the Group's borrowings which are at a fixed rate of 7.625%. Therefore, the Group considers there is no significant risk to the Group at 31 March 2020.

Amounts receivable from customers are charged at 49.9% APR over a period of one to five years.

Foreign exchange risk

Foreign exchange rate risk is the risk of a change in foreign currency exchange rates leading to a reduction in profits or equity. There is no significant foreign exchange risk to the Group. The Group does incur some operating costs in USD and Euro, which it does not hedge as there would be minimal impact on reported profits and equity. Amigo Luxembourg S.A. is a GBP functional currency entity and gives no foreign exchange exposure upon consolidation. Amigo Ireland first lent to customers in February 2019; whilst its functional currency is Euro, operations are not material to the Group. At 31 March 2020, the Irish net loan book represents 0.9% of the Group's consolidated net loan book (2019: 0.02%). A 5% movement in the Sterling to Euro exchange rate would have led to a +/- £0.3m movement in customer receivables. Hence, foreign exchange risk is deemed immaterial.

Liquidity risk

Liquidity risk is the risk that the Group will have insufficient liquid resources to fulfil its operational plans and/or meet its financial obligations as they fall due. Liquidity risk is managed by the Group's central finance department through daily monitoring of expected cash flows and ensuring sufficient funds are drawn against the Group's finance facilities to meet obligations as they fall due.

The Group's forecasts and projections, which cover a period of more than twelve months from the approval of these financial statements, take into account expected originations, collections and payments and allow the Group to plan for future liquidity needs.

Maturity analysis of contractual cash flows of financial liabilities

Brexit

The economic outlook post-Brexit remains uncertain and has led to a significant amount of instability in the UK economy and capital markets. There has not been any significant impact on the Group's businesses to date.

Covid-19

The Covid-19 pandemic has created significant economic uncertainty in the UK and the rest of the world, which has increased the credit risk for the Group's customer loans and receivables. Whilst it is difficult to precisely predict the impact that Covid-19 will have on credit risk, the Group has estimated its impact on expected credit losses. Further details can be found in note 2.1 and note 13.

Capital management

The Board seeks to maintain a strong capital base in order to maintain investor, customer and creditor confidence and to sustain future development of the business. The Group has no minimum capital requirements imposed on it by regulation.

15. Other receivables

16. Trade and other payables

17. Bank and other borrowings

The Group's facilities are:

• A £300m revolving securitisation facility, of which £230.0m was drawn down (net of amortised fees) at 31 March 2020 (2019: £158.6m). The facility has a blended margin of 1.6% over LIBOR, being a proportionate blend of notes at 1.55% and notes at 2.55%. The facility was to mature in June 2022 and has a 0.7% charge on non-utilised funds. It is a three year revolving term with a four year amortisation period to June 2026. The relevant floating interest rate is LIBOR, which was 0.25% at 31 March 2020 (2019: 0.84%). This relates to the structured entity discussed in note 24.

• A £109.5m bank loan (Sterling revolving credit facility), of which £nil had been drawn down ((£0.7m) net of unamortised fees) at 31 March 2020 (2019: £2.8m). The facility matures in May 2024. The bank facility interest rate is set at a margin of 2.9% plus LIBOR for utilised funds and a charge of 1.16% for non-utilised funds (being 40% of the 2.9% margin). These terms were renegotiated on 17 May 2019. £2.2m of unamortised fees relating to the facility were released to the consolidated statement of comprehensive income as the renegotiation was deemed a substantial modification. The relevant floating interest rate is LIBOR, which at year end was 0.25% (2019: 0.84%). The RCF was cancelled on 27 May 2020.

• Senior secured notes in the form of £231.3m high yield bonds with a coupon rate of 7.625% which expire in January 2024. It is presented in the financial statements net of unamortised fees. As at 31 March 2020, the gross principal amount outstanding was £234.1m. On 20 January 2017, £275m of notes were issued at an interest rate of 7.625%. The high yield bond was tapped for £50m in May 2017 and again for £75m in September 2017 at a premium of 3.8%. £85.9m of notes have been repurchased in the open market in the financial year (2019: £80m) - this debt was extinguished in line with the accounting policy set out in note 1.12.

The bank facility and the senior secured notes are secured by a charge over the Group's assets and a cross-guarantee given by other subsidiaries - see note 27 for detail of subsidiaries.

18. Provisions

Provisions are recognised for present obligations arising as consequences of past events where it is more likely than not that a transfer of economic benefit will be necessary to settle the obligation, which can be reliably estimated.

Customer complaints redress

As at 31 March 2020, the Group has recognised cumulative provisions totalling £126.8m, all of which were recognised in the financial year to 31 March 2020 against customer complaints redress and associated costs. Utilisation to date is £9.3m, leaving a residual provision of £117.5m. Our lending practices have been subject to significant shareholder, regulatory and customer attention and this combined with FOS' evolving interpretation of appropriate lending decisions during the period, has resulted in an increase in the number of complaints received. The charge in the financial year to 31 March 2020 was recognised following increased complaint volumes, and an increase in the uphold rate for valid complaints following a change of approach in the year by the Financial Ombudsman Service.

The current provision reflects the estimate of cost of redress relating to customer-initiated complaints and complaints raised by claims management companies (CMCs) for which it has been concluded that a present constructive obligation exists, based on the latest information available. The provision has two components, firstly a provision for complaints received but not yet processed, and secondly a provision for the projected costs of potential future complaints where it is considered likely that customer redress will be appropriate, based on the available data on the type and volume of complaints received to date. The provision is not intended to cover the eventual cost of all future complaints; such cost remains unquantifiable and unpredictable. There is significant uncertainty around: the emergence period for complaints; the activities of claims management companies; and the developing view of the FOS on individual affordability complaints, all of which could significantly affect complaint volumes, uphold rates and redress costs. 

It is possible that the eventual outcome may differ materially from the current estimates and this could materially impact the financial statements as a whole, given the Group's only activity is guarantor-backed consumer credit. This is due to the risks and inherent uncertainties surrounding the assumptions used in the provision calculation. In particular there is significant uncertainty around impact of Financial Ombudsman actions and potential changes to remediation arising from continuous improvement of the Group's operational practices, which may have a material impact on the eventual volume and outcome of complaints.

The Group continues to monitor its policies and processes to ensure that it responds appropriately to customer complaints. The Group will continue to assess both the underlying assumptions in the calculation and the adequacy of this provision periodically using actual experience and other relevant evidence to adjust the provisions where appropriate.

See note 2.3 for details of the key assumptions that involve significant management judgement and estimation in the provision calculation, and also for sensitivity analysis.

Contingent liability

On 29 May 2020 the FCA commenced an investigation into whether or not Amigo's creditworthiness assessment process, and the governance and oversight of this, was compliant with regulatory requirements. The FCA investigation will cover lending for the period from 1 November 2018 to date. There is significant uncertainty around the impact of this on the business, the assumptions underlying the complaints provision and any future regulatory intervention.

Such investigations take an average of two years to conclude but the investigation could be concluded within the next twelve months. There are a number of different outcomes which may result from this FCA investigation, including the imposition of a significant fine and/or the requirement to perform a back-book remediation exercise. Should the FCA mandate this review it is possible that the cost of such an exercise will exceed the Group's available liquid resources. The potential impact of the investigation on the business is unpredictable and unquantifiable.

19. Leases

The application of IFRS 16 to leases previously classified as operating leases under IAS 17 resulted in the recognition of a right-of-use asset and a lease liability. The addition in the year relates to a new second office in Bournemouth. All right-of-use assets relate to property leases. For short-term and low-value leases, lease payments are recognised in the consolidated statement of comprehensive income on a straight-line basis over the lease term.

Right-of-use assets

Lease liabilities