> Posted by Jeffrey Riecke, Communications Associate, CFI
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Wonga, the U.K.’s largest payday lender, is forgiving £220 million in loans from 330,000 clients in arrears. Another 45,000 Wonga clients on precarious financial footing will no longer have to pay interest on their active loans. The news came last Thursday after talks between Wonga and the U.K. regulator, the Financial Conduct Authority (FCA), which culminated in Wonga instilling new, and reportedly urgently needed lending affordability checks. The forgiveness measures are intended to cover clients that wouldn’t have been given loans under the new affordability measures. They follow what has been a controversial rise for the lending firm and suggest where the U.K’s payday industry may be headed.
Wonga, which currently lends to about a million clients a year, has incurred complaints in the past for its lack of affordability checks, high interest rates, unscrupulous debt collection practices, and misleading advertising. Those speaking out against the firm include politicians, trade unions, and public demonstrators. Even Archbishop of Canterbury Justin Welby once stated that he would “compete [Wonga] out of business” through the launch of a Church-backed group of credit unions.
Wonga’s advertising campaigns have featured “mom and pop” character puppets, as well as sponsorship of the Newcastle United football club which entitled Wonga’s logo to appear on the players’ jerseys. Both initiatives incited criticism that the firm pushed loans to younger clientele. At the time of the agreement with Newcastle, the leader of the Newcastle City Council stated that he was “appalled and sickened” that the club signed the deal. Wonga’s advertising received a setback in April of this year when a regulator forced a campaign to be cancelled in which viewers were misled on interest rates.
On collections, last June the FCA revealed that Wonga sent thousands of fake legal letters to clients in the attempt to scare them into paying. The regulator ordered Wonga to offer redress to the roughly 45,000 clients affected.
In the media frenzy following last Thursday’s announcement, the firm’s critics have not been soft spoken. Online news site TechCrunch wrote, “No, that’s not disruptive business behavior. It’s plain old loan sharking.” Forbes wrote, “If Wonga can transform itself into a responsible short-term lender, it may for the first time provide a useful public service.” Member of Parliament (MP) Pat McFadden, who serves on the Commons Treasury Committee said, “These findings drive a coach and horses through the claim that Wonga has been lending responsibly.” Fellow MP on the Treasury Committee John Mann said, “I welcome today’s latest step to crack down on irresponsible payday lenders… This is a company that has taken advantage of people in dire financial circumstances.”
What’s happened with Wonga suggests the possibility of sweeping changes for payday lending in the U.K. Though Wonga’s new affordability checks are reportedly voluntary, the director of supervision at the FCA stated that the proceedings “should put the rest of the industry on notice” in terms of lending affordably and responsibly. In July of this year, the FCA announced that it plans to cap the interest rates payday lenders can charge as well as the number of times loans may be rolled over. A recent review of the industry revealed that the average annual salary of a payday loan recipient is roughly £16,500, well below the median in the U.K. of £26,500. Moreover, payday borrowers are often already heavily indebted.
Of the larger industry, MP Stella Creasy recently said, “Wonga is not the bad apple – the industry is a rotten barrel.” Gillian guy, Chief Executive of the nonprofit Citizens Advice said, “A lack of checks by lenders is setting a debt trap for borrowers. It is a widespread problem within the industry. Citizens Advice has found that in half of payday loans cases reported to us, lenders didn’t ask about people’s personal finances.” Industry advocates, such as the Centre for Responsible Credit, are campaigning for similar reforms for other payday lending firms.
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