One of the UK’s major guarantor lenders has said it intends to enter into a scheme of arrangement, which could result in consumers with complaints against the firm receiving less than they expected.

The vote on the scheme of arrangement proposal is expected to take place in March 2021. If the firm’s customers, the Financial Conduct Authority and the High Court approve the proposal, customers will have a further six months to submit any claim they have for unaffordable lending.

It has been reported that the FCA has refused previous proposals from short-term lenders for their own Schemes of Arrangements.

It must be stressed that a scheme of arrangement is not an insolvency solution, so this announcement should not be taken as an indication that the firm in question is insolvent. However, a scheme of arrangement is a legal device that allows a firm to vary the rights of some or all of its creditors and/or shareholders. In practical terms, it could mean the same thing for customers who have a complaint against the firm, who would then be classed as unsecured creditors of the lender, and who may then not receive the full amount they would normally receive should they have a complaint upheld by the firm or the Financial Ombudsman Service.

The firm has made this commitment regarding how much it will contribute to the Scheme:

“The Company anticipates the immediate cash payment under the Scheme towards the Redress Claims Pool will be £15 million, with the option for this to increase should the anticipated Balance Adjustments be less than expected, up to an extra £20 million of cash. In addition, the Company will make a cash contribution to the Scheme based on 5% of profit for the next three financial years ending 31 March 2024.”

Some commentators have suggested that this commitment falls well below what the claimants might expect to receive from their complaints, in normal circumstances.

The firm has experienced severe financial difficulties in recent years, so opinion is divided as to whether this Scheme is a necessary step to avoid liquidation, or an attempt to limit the amounts the firm needs to pay in complaints redress. The firm has paused new lending but says that the approval of the Scheme would allow it to resume new lending.

The firm has apparently been hit by a triple whammy of FCA action, upheld complaints at FOS and the effects of Covid-19. The FCA is said to be investigating the firm’s affordability and creditworthiness checks, which could lead to an instruction from the regulator to pay compensation to disadvantaged customers. The FOS upheld 89% of guarantor loan complaints in the last full financial year.

At present, the FOS says it can continue to assess complaints about the firm, and the lender says it continues to process any complaints it receives. Any customer with an agreed payout from the firm, or who has already had a final decision from FOS, should not be affected by the proposal and should still receive the full amount they are expecting.

Scott Robert are experts in FCA authorisation for regulated firms.