Amigo Regulatory News (AMGO)

Three lines of defence

Best practice approach to ensuring ownership, challenge, and assurance for all risks

Risk ownership

Clear accountability at the Executive Committee ("ExCo") level for specific risks

Risk and control self-assessment

Process in which the first line, facilitated by the Risk function, formally reviews, assesses, and documents its risks, controls, and key risk indicators

Risk monitoring and reporting

Monitoring of risks within each functional area and through an integrated view at the Executive Committee and Board levels

Risk mitigationprogrammes

Defined and tracked programmes of actions to bring out-of-appetite risks within appetite

Incident management

Structured process for capturing significant incidents, capturing the lessons and updating risk assessments and controls as necessary

Risk appetite statement

Articulation of the level and types of risks that Amigo is willing to take in pursuit of its strategic goals

Risk taxonomy

Common language of risk across the business to support both assessment and communication

The risk that a counterparty will not repay a debt in full and on time, with potential impacts including increased impairment, reduced profitability and cash flow, and significant diversion of management time and effort. This includes idiosyncratic lending risk, macroeconomic risk and new lending pilot risk.

Amigo is a mid-cost lenderand we take a degree of credit risk that is consistent with our pricing. Core lending, the bulk of our business, is to customer segments we understand well. We also engage on a controlled basis in pilot lending, testing new segments that we think are appropriate for our product. Amigo does not have an appetite for material wholesale credit risk or other credit risk outside its lending business.

The guarantor nature of our product significantly mitigatesthe credit risk of our lending, and our Decision Science (Analytics) team uses available data to identify lending that is within our risk appetite. We explore new lending segments on a controlled basis through our pilot lending programme. Our Collectionsteam works with customers who fall behind on payments to assist them in coming back up to date on their obligations.

Origination through the year has continued our focus on well-understood segments, with older lending pilots either being promoted to core lending or terminated and fewer new pilots pursued. Lending criteria have been tightened, with more focus on borrower credit history and stricter rules on top-up eligibility. However, operational challenges have led to increased arrears in the back book and higher impairments. There was some recovery at the end of the year, but more remains to be done. The macroeconomic environment was more challenging than expected, with Brexit-related uncertainty dragging on.

The emergence of Covid-19 at the end of the year led to a further large increase in credit risk, though much of that came after the end of the reporting year. The economy has been severely disrupted and the path back remains unclear. Relief measures have been offered, and there may be challenges getting customers back to regular payments, even when they are financially able to do so, as well as maintaining normal collections activity.

The risk that Amigo's actions will lead to poor outcomes for our customers, either borrowers or guarantors. The primary impact is the potential harm to those customers, but impact on the Company may include the cost of redress, regulatory action (potentially including investigation, fines, or even loss of authorisation to operate), the operational burden of responding to unhappy customers, and reputational damage. This includes affordability risk, the risk of customer misunderstanding and the risk of persistent debt.

Amigo recognises that borrowing or acting as a guarantor is a big decision for our customers and we seek to ensure that those decisions are fully informed and appropriate.

Amigo believes that the most effective mitigation of customer and conduct risk is based in corporate culture. To that end, we seek to instil a customer-oriented mindset in all employees. Performance metrics and remuneration at all levels are designed with good customer outcomes in mind. Any customer complaints or other evidence of adverse customer outcomes are thoroughly investigated to understand the root cause, and changes are made to business practices when appropriate. Affordability is assessed for both borrower and guarantor on all loans, and we speak with all guarantors to ensure they fully understand their obligations. Measures are in place to identify and work carefully with vulnerable customers. As a second line of defence, a system of compliance monitoring covers all customer touchpoints.

Amigo's culture remains strongly customer focused and our product offering remains simple and transparent. We have recently enhanced our affordability checks in pay-out, requiring more detailed documentary evidence in more cases and integrating open banking into our processes. We have worked closely with the FCA as it carried out thematic reviews of the sector and supported measures to ensure that guarantors are thoroughly aware of their obligations. We have faced significant challenges adapting to the change in standards from the FOS and the increase in complaint volume and complaints upheld that has resulted. These complaints are being individually assessed, and where a complaint is upheld it is due to the particular circumstances of that case. We continue to explore root causes in line with regulatory expectations. We continue to explore all options to address this issue, from constructive engagement with the FOS to understand their current standards to challenging them where we disagree, and Amigo is open to judicially reviewing decisions that we believe are wrong. Our customer and conduct risk management continues to develop in line with evolving regulation and industry best practice.

Covid-19 has led to some increase in customer and conduct risk, as existing customers have had their finances disrupted and potential new customers are less certain of their ability to afford a loan. We have mitigated this risk by offering payment holidays where needed. We have also limited new lending to key workers in exceptional circumstances.

The risk that the regulatory or political environment will change in a way adverse to our business. This may be explicit changes in regulation or legislation or changes in interpretation. At a minimum, the impact would be the operational burden of adapting to changing regulation. But where we fail (or have failed) to adapt to changes, the impact can extend to regulatory action, potentially including investigation, fines, or even loss of authorisation to operate. It includes regulation or legislation specific to our product, applying to financial services more generally, or not specific to our business at all.

Amigo is in a sector (financial services) and a sub-sector (alternative finance) that are inherently subject to significant regulatory and political risk, but we take all reasonable steps to reduce that risk as it applies to us.

Amigo proactively engages with regulators and politicians to ensure they understand our business model and the value of the service we provide to our customers. We support sensible regulation and legislation that enhances the functioning of the consumer finance market. We scan the horizon for potential changes that may affect our business in order to prepare for them before they are implemented.

The FCA has carried out a number of reviews through the year that have dealt with our business, both specifically and as part of the wider sector. Where we have received the results of these reviews, we are comfortable that we can implement the actions they have asked for, including enhanced disclosure to guarantors and more detailed affordability checks. Indeed, as a leader in the sector, we feel we can respond better than many competitors. However, some of this enhanced regulation may leave certain segments, particularly lower value and shorter-term lending, uncommercial, and more regulation may come as the results of other reviews are released. In addition, after the end of the financial year, the FCA began an investigation into whether Amigo's creditworthiness assessment process, and the governance and oversight of this, was compliant with regulatory requirements. The risk in this area remains elevated.

Covid-19 has driven new regulatory guidance, broadly designed to mitigate the impact of the pandemic on consumers by shifting it to lenders, e.g. by requiring substantial relief measures. This new regulation was issued very quickly, without time for a normal consultation period and without taking into account concerns raised by Amigo and others in the industry, particularly around issues arising from the inflexibility of the Consumer Credit Act. There may therefore be significant unintended consequences of this regulation. There may also be more regulation to come.

The risk of a loss or negative impact due to inadequate or failed internal policies, processes or systems or from external events. A data security or cyber incident leading to a breach of personal data could result in harm to customers, fines, bad publicity, and a loss of customer trust. System downtime could also lead to customer inconvenience or detriment, loss of revenue, and reputational impact. Failure to properly execute payout or collection processes could lead to financial losses, customer harm, and even regulatory action. Errors in contracts with key suppliers may lead to them being unenforceable, resulting in additional cost and disrupted service.

Amigo takes a proportionate approach to operational risks, balancing the need to provide consistent and reliable operational performance with the need to remain nimble, refining our operations in a continually changing environment.

IT infrastructure and systems are designed with security, redundancy and spare capacity and are regularly tested. Disaster recovery and incident response plans are in place. The Change Management team provides second line review over all changes in process or systems. First and second line functions monitor process execution and feed back to process owners to continually drive improvement.

The business has continued in its tradition of rapid operational change, with both efficiency and the control environment continuing to improve to keep overall risk in line. In some areas, our operational capacity has fallen somewhat behind our scale, particularly in complaints handling, though these issues are being addressed. Our cyber security and IT resilience are constantly evolving, but the threats are as well, resulting in a stable risk position.

Covid-19 has presented a business continuity challenge that we had not specifically prepared for, but we have adjusted swiftly to circumstances, significantly expanding remote working and maintaining customer service. However, at the time of this report the external environment remains highly uncertain, and operational risk can only be seen as slightly elevated.

The risk that Amigo will not have the number and quality of people necessary to deliver on its strategy. This may leave the Company unable to properly service its customers, leading to customer harm and loss of profitability. It may also result in the Company being less able to perform key functions.

Amigo aims to have the quantity and quality of people necessary to meet its objectives at all times and to maintain its performance in case of unexpected loss of key personnel.

Amigo regularly considers succession plans for all key people, including internal and external options. We seek to minimise the potential for disruption to business operations from the unexpected loss of key individuals through good knowledge management. General staffing requirements are planned well in advance. Amigo positions itself as a highly desirable employer with its combination of culture, work environment and compensation.

Amigo has continued to improve the breadth and depth of its senior management, adding "bench strength" and improving succession planning. Overall staffing levels remain adequate but a number of initiatives have been put in place that have improved recruiting and retention across the business. There have been a number of changes at ExCo and Board level during the year, and the strategic review, formal sale process and related issues have created significant challenges with hiring and retention, particularly at senior levels.

Covid-19 has had little direct impact on our people, but an elevated risk of sickness and disruption will remain as the country emerges from lockdown, even allowing for social distancing and hygiene measures that were implemented prior to beginning our phased return to the offices.

The risk that Amigo fails to achieve its objectives, either due to actively poor decisions or a passive failure to adapt to changes in the competitive environment, leading to reduced revenue, increased expenses, or lost opportunities. This includes the risk of new competitors and the risks in entering a new geography.

Amigo maintains a simple strategy, focusing on maintaining its strong position and leading execution in the guarantor loans space while exploring adjacent niches that can be developed using our specialised capabilities if they prove promising.

Amigo keeps our strategic focus on our guarantor loan product, doing one thing and doing it extremely well. We do not extend ourselves into barely related product areas. We closely monitor developing competition and counter it with our strong brand and operational excellence.

Amigo Ireland has continued to develop on plan. It remains a fairly small piece of the business but it shows the potential for international expansion. We continue to face a large number of small competitors in the domestic space and while our brand, product share, and operational efficiency remain notable strengths, we have also been testing ideas like risk-based pricing to help to defend our position. The wider market continues to evolve, with some competitors having left the space and brokers finding their business models disrupted. Operational and regulatory challenges in our core business have led to a strategic review, which is currently underway.

The risk arising from the core actions of the Treasury function. A failure to properly manage liquidity could lead to the Company requiring more expensive funding, reducing profitability, or even being unable to meet its obligations as they fall due.

Amigo operates its Treasury function to support the growth of its lending business. Treasury is not a profit centre and avoids or hedges any material risk.

Amigo maintains diversity of funding sources and term length. We seek to keep substantial headroom to covenant levels on funding agreements such that there is no material chance of breaching them. Our current strategy creates no material interest rate risk or market risk but, if that changes, it will be hedged.

Through the course of the year, Amigo repurchased debt and explored further diversification of funding sources; however, funding diversification efforts were paused and, after the financial year end, the RCF was cancelled. In addition, operational issues have led to less headroom on funding covenants and an increased risk that funding lines will be put into amortisation. Reduced origination toward the end of the year has left the business highly cash generative, but there may be liquidity challenges in any return to prior origination volumes. Foreign exchange risk remained immaterial.

With Covid-19 and the requirement for extensive relief measures, liquidity risk has increased. Collections have been less impacted than initially expected, supported by increased early settlement, and we came to a temporary agreement on our securitisation funding to accommodate the extraordinary situation. But as the path to recovery remains unclear and any extension of the agreement on the securitisation is subject to negotiation, significant risk remains.

The Company has a shareholder that possesses sufficient voting power to have a significant influence over certain matters requiring shareholder approval, including the election and removal of Directors, dividend policy, remuneration policy and approval of significant corporate transactions. The shareholder may also exercise influence through informal channels, such as social media. The position of the shareholder may not always be aligned with the opinion and interests of management, the Company or the Company's other shareholders. This may have a financial, reputational, and regulatory impact, require significant management time and effort to address and result in litigation by, or against the Company. For more information on the shareholder with significant influence please see page 87.

The Company seeks to foster effective engagement with, and encourage participation from, its shareholders and its significant shareholder in particular. It seeks to engender a culture where the Company is responsive to the views of its shareholders.

The former Chair of the Board has historically sought both formal meetings and regular informal engagement with this shareholder to understand its views on governance and performance against strategy. Similarly, the Chairs of the Board Committees have also sought engagement with this shareholder on significant matters related to their areas of responsibility. This mitigation is dependent on this shareholder being receptive to such engagement. The Company took the decision, during the year, not to actively engage with comments made by this shareholder via social media, in order to ensure the Company was able to maintain a dialogue with all shareholders in line with its reporting obligations.

The Company has entered into a Relationship Agreement with this shareholder, which contains contractual obligations on the majority shareholder to ensure that the Company operates independently. Further detail on the Relationship Agreement can be found on page 87.

During the past year, this shareholder placed a representative on the Board and declared an intention to place a second, declared its willingness to sell its stake in the Company, triggered a formal sale process, withdrew its representative and pending nominee from the Board, requisitioned a General Meeting with the stated intention of removing all the Board members and appointing two replacements and declared an intention to sell down its entire stake if the vote at the General Meeting went against it. The General Meeting was held after the end of the financial year, and the measures proposed by the majority shareholder were not approved. The shareholder has begun to sell down as declared and at the time of this report, holds less than 50% of the Company's shares. The risk has therefore reduced from its peak, but it remains as long as the shareholder has a stake that allows it to exercise significant influence. While it is possible that a new shareholder will develop a stake that gives it significant influence, this is not viewed as a material source of risk.