WITH payday lender Wonga collapsing into administration this week, thousands of borrowers seeking compensation for being mis-sold loans by the company face an uncertain time.
Following much speculation over the past week, Grant Thornton was appointed as administrator to Wonga on Thursday. The short-term credit company had been dogged by scandal since it was launched in 2006 by South African entrepreneur Errol Damelin, who cashed in £17 million worth of shares after stepping down as chief executive five years ago.
The firm was the first to use the internet to lend a few hundred pounds over a month through a quick automated process, but at an annual interest rate of 4,214 per cent – far higher than the double-digit APRs typically charged for personal loans or
credit cards.
The business was aimed at younger consumers who needed cash before their next payday. Sharp marketing techniques included free money for those who recommend Wonga to their friends on Facebook, as well as a short-lived page on the firm’s website that advocated the merits of its products over student loans.
Wonga made pre-tax profits of £84.5m at the height of its success in 2012. But its fortunes nosedived following a devastating regulatory investigation. In 2014, the Financial Conduct Authority (FCA) warned of “unfair and misleading” debt-collection practices and ordered Wonga to pay £2.6m to 45,000 customers, who had received fake legal letters pressurising them to make payments they could not afford.
An industry-wide clampdown followed shortly after, banning payday lenders from charging more than 100 per cent of the value of loans, with interest and fees capped at 0.8 per cent per day of the amount borrowed.
Most crucially, the regulator found borrowers had been routinely given money without affordability checks and were allowed to take out more loans to stay afloat, trapping them in a cycle of debt. Cash was also often taken from borrowers’ bank accounts without their permission through continuous payment authorities.
The FCA ruled that borrowers would be entitled to compensation from lenders – a full refund of their loan and interest charges, plus a statutory 8% on top – if they could prove their loans had been unaffordable. Thousands of borrowers began bringing complaints shortly afterwards, with many forced to go to the Financial Ombudsman Services (FOS) for an independent adjudication.
The FOS told The Herald that it received nearly 11,000 complaints about payday loans in the first quarter of this year – a 251% rise from 3,126 received in the first quarter of 2017. That is also more than the 10,529 complaints about payday loans received across the whole 2016/17
financial year.
However, success rates are falling: the FOS is now only upholding 56% of cases, compared to 68% in 2016/17.
Now that Wonga has appointed administrators, though, it appears unlikely that those who have filed a claim will receive any payout, with claimants being added to a long list of creditors who are owed money by the firm.
Bigger creditors and those who lodged complaints earlier will be prioritised.
The FOS said it would be speaking to Wonga’s administrators to clarify the impact on cases that have already been filed and whether any new cases can be brought forward.
“We do not yet know what, if any, funds will be available to settle complaints,” a spokesman said.
Despite this, the FCA has said that any Wonga customers who are still paying back loans should continue to do so, with the firm’s loan book likely to be sold on to a competitor.
“Customers should continue to make any outstanding payments in the normal way,” the regulator said in a statement.
“All existing agreements remain in place and will not be affected by the proposed administration.
“However, the firm is no longer able to issue
new loans.”
There had already been uncertainty over whether Wonga’s funds would have been enough to cover all outstanding and potential compensation cases, with other payday lenders that have gone into administration having patchy records of paying refunds.
Edinburgh-based Cheque Centre, for example, ran out of redress money just a couple of months after collapsing last year while Cash Genie, which collapsed in early 2016, has continued to pay out.
For Neil Jameson of community organising group Citizens UK, Wonga’s demise shows that more should be done to promote ethical lenders such as credit unions rather than payday lenders for people in need of short-term credit.
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