Wonga in UK succumbs to massive consumer claims and goes into Administration

On Thursday (UK time), BBC News announced payday lender Wonga in the UK was going into administration. Grant Thornton will act as administrators.
In September 2017, its last published accounts reported the company making a loss of £66.5m. At that stage, it said costs and impairments were falling but it remained a going concern. It had approximately 220,000 current customers on a loan book of around £430m. On Thursday, it reported these figures hadn’t changed much, so there will be approximately £400m for the administrators to collect.

Following emergency talks with the UK’s finance industry regulator, the Financial Conduct Authority (“FCA”) said it would continue to supervise Wonga and seek fair treatment for customers following its 2014 ruling that Wonga’s debt collection practices were unfair.

In 2014, the firm introduced a new management team and wrote off £220 million-worth of debt belonging to 330,000 customers after admitting making loans to people who could not afford to repay them. The FCA also ordered the company to pay £2.6m to compensate 45,000 customers after it used a fake debt collection company to threaten consumers into paying what they owed.

The FCA then followed this up by capping all UK payday loans at 0.8% per day and encouraged consumers to lodge compensation claims for irresponsible lending practices.

Due to FCA requirements, these claims cost Wonga £550 each to process, regardless of whether or not the borrower’s claim was proven.

The UK environment

Because of Google’s requirements, most UK payday loans have a term of just over 60 days. At 0.8% per day, this just happens to equate to 48% but for those taking longer to repay, the company could obtain almost 285% annually. Note this rate is flat, not daily reducing. The payday loan returns in the UK cannot be compared to those for Small Amount Credit Contracts ("SACC’s") here in Australia.
Unsurprisingly, many of these claims came from ambulance-chasing claims management companies. One of these, PaydayRefunds, said it had lodged around 8,000 claims against the lender in the last six months alone.
Wonga’s website states it has stopped taking new applications, which will ultimately put up to 500 jobs at risk. Based on experience, it’s likely existing customers will try and stop making payments. For those consumers that are still to claim or have their claims accepted, it’ll no doubt leave them as unsecured creditors should the firm go into receivership or bankruptcy.
A Guardian article cites Hollywood actor Michael Sheen, who became a campaigner against high-cost lenders on both sides of the Atlantic, said the collapse was a “pivotal moment” and that “the government should use [its collapse] to support the growth of ethical lenders. [Wonga] thrived when they thrived because of demand. That demand is not going to go away. The real danger is that those customers are going to go to possibly even worse places. The opportunity is there, there are alternatives – there are fair and responsible credit providers.”

Consumer Advocate Tactics

You can be sure UK consumer advocates will be jumping for joy at Wonga’s woes and that their Australian counterparts will have noted what, and more importantly, how it’s occurred. They will doubtless have some current big players in their sights here that they’d like to see closed down on whom they could start using identical tactics. They won’t just be looking at SACC lenders either, given some of the Royal Banking Commission revelations. ASIC already encourages similar actions here to what the FCA does in the UK, so lenders should be aware of the huge costs that may be involved in processing claims. That £220 million and £2.6m compensation demand was chicken-feed in comparison to meeting the additional cost of processing claims that arose afterwards.
The answer to ensuring your don’t face similar regulatory action and you’re seen as a fair and responsible lender is transparency, honesty and compliance. In particular, I’d suggest you make sure your responsible lending requirements and loan suitability obligations have been and are being met. I come across many lenders that believe ‘loan suitability obligations’ are the same as ‘responsible lending requirements’. They are not and ASIC is already seeking further legislation changes to ramp up its regulatory toolkit.
You can sleep easier at night if you are doing the right thing. Where you’ve any doubts, get an internal audit done asap to provide some peace of mind. Even if the auditor finds some issues, you’ll get some recommendations on how to fix them, which you won’t get if ASIC instigates the audit requirement.