The future for the PayDay industry following the collapse of Wonga

Sohail Ismail, Litigation Executive and Team Leader for Consumer Debt Litigation, has provided his opinion on the recent collapse of Wonga following the news that they have entered into administration.

What/who are Wonga?

Wonga was once a prominent PayDay lending company which burst onto the “short-term loan” market in early 2006, and was believed to have over a million customers at one point.

On 30 August 2018, Wonga went into administration following a surge in compensation claims made by its customers, and as of 31 August 2018, Chris Laverty, Daniel Smith and Andrew Charters of Grant Thornton UK LLP were appointed as the company’s joint administrators.

A recent announcement by the Administrators on the Wonga website states as follows:

“Despite efforts to restructure the business, which included an injection of funding by the Group’s shareholders the business was unable to be restored to profitability due to the level of redress claims. As a result, the management team had no alternative but to place the above companies into administration.”

The statement also advises that the appointment of Administrators means that there will be no new lending activity, and that the Administrators will now be left to effect an orderly wind down the business to facilitate a sale of company assets and start identifying all creditors.

The statement went on to say:

“The Administrators will continue to work closely with the Financial Conduct Authority (FCA) as the administration process progresses, supporting customers where possible during this period. All outstanding loans remain subject to the terms agreed with Wonga and customers should continue to make payments in the usual way.”

Where did it go wrong for Wonga?

Criticism in the PayDay lender market is never far from the media. It’s like a lot of things in the debt recovery industry, in that the initial perception is poor until you really look into practices and establish what a business is really like. However, it would appear criticism by Wonga’s customers of their practices was prevalent.

In 2012, the Office of Fair Trading (‘OFT’) told Wonga that it must improve its debt collection practices, after it was established that Wonga staff had tried to recover some outstanding debts by suggesting defaulting customers had committed fraud and may end up being reported to the Police as a result.

David Fisher, (OFT Director of Consumer Credit at the time), said:

“We have acted to ensure that Wonga does not behave this way again. I would like to make it clear to businesses that they must not adopt aggressive or misleading practices with their customers.”

Furthermore in June 2014, the Financial Conduct Authority (‘FCA’) found that Wonga’s debt collection practices were unfair and ordered that affected customers be compensated.

Wonga received further criticism in relation to the FCA findings, which showed that between October 2008 and November 2010, Wonga had sent their customers letters purporting to be from non-existent law firms named as ‘Chainey, D’Amato & Shannon’ and ‘Barker and Lowe Legal Recoveries’, to collect money from them, with some customers being charged for the supposed “lawyers’ fees” for these letters.

Following discussions with the FCA, Wonga agreed to write off what was thought to have been in excess of £220 million belonging to 330,000 customers, after admitting to providing loans to customers who could not afford to repay them.

It is now thought that the failures of Wonga are a result of its highly criticised lending practices, and that the inundation of customer compensation claims invariably led to the company’s collapse.

Following the collapse of Wonga, it has recently come to light that the Church of England is to meet to consider leading a buyout of the company.

Calls were made by MP Frank Field to the Administrators, to delay making any deals with any private-based companies, in a bid to allow the Church of England time to consider what it could potentially do.

The Archbishop of Canterbury (who has historically been a critic of PayDay lenders) is now set to lead a non-for-profit attempt to buy the outstanding £400m+ Wonga loan book. It is understood that a meeting is set to take place over the coming days, whereby the Archbishop of Canterbury will meet with investors and charitable foundations to see if a resolution can be reached, with the ultimate aim to provide assistance to around over 200,000 of Wonga’s customers.

Why this isn’t the end for the Short Term PayDay lending industry

Despite the demise of Wonga, I certainly do not think it is the end for the PayDay lending industry. It is of course disappointing that the Wonga of old got it so wrong, as they had clearly worked hard to promote the brand and were one of the leaders in the industry sector.

Many PayDay lenders are now regulated by the FCA, and as such, customers can now be provided with the peace of mind that their chosen lenders are:

  1. Required to be more stringent when lending to them based on their individual circumstances at the time of obtaining credit; and
  2. That they are fully adherent to any regulatory protocols expected of them when lending to customers.

The positive work and investigations the FCA carried out in this area, and particularly in respect of the case of Wonga, has brought the right outcome for the customer and also improved lending practices in the industry. I am also hopeful it provides some comfort to customers knowing that the regulator will act where needed, effectively.

It should be noted that such lenders are used by all sectors of society including those in the private sector and professionals alike, as it offers a fast and efficient decision with a user friendly platform for customers to use. Lenders are also able to offer lending on a daily basis with the interest calculated daily as well.

Having worked with a number of the Payday providers since the FCA governance was introduced, we are at the forefront of seeing the real impact in customer experience and satisfaction of how the lenders continue to offer real solutions from the standard Payday loan to a higher value longer repayment solution which, when you compare to, for example, a bank overdraft rate, it can be a much cheaper short term financial solution if utilised correctly.

So for all the stigma surrounding PayDay lending, this financial product still remains highly popular with customers in providing short-term credit. Used correctly, it can be a very helpful short term tool for customers who have immediate cash flow requirement. With the adequate and stringent checks now in place to check affordability, I do feel there remains a strong future in the PayDay lending market to meet customer demands.

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