Wonga forced to pay up over ‘unfair’ practices

Wonga, Britain’s biggest payday lender, has been ordered to pay more than £2.2m ($3.76m, €2.78m) in compensation to defaulters to whom it sent threatening letters appearing to come from solicitors or debt collectors.

In addition, customers who paid administration fees demanded for the referrals to the fake pursuers will receive refunds, and extra compensation may go to others in certain circumstances.

The letters, seemingly from Chainey D’Amato & Shannon and Barker & Lowe Legal Recoveries – all names of Wonga employees – threatened legal action if outstanding debts remained unpaid.

The Financial Conduct Authority (FCA), the regulator that ordered the compensation, accused Wonga of “unfair and misleading debt collection practices”.

Clive Adamson, the FCA’s director of supervision, reported: “Wonga’s misconduct was very serious because it had the effect of exacerbating an already difficult situation for customers in arrears. We are pleased that Wonga has been working with us to put matters right.”

Finance specialist Martin Lewis called Wonga’s conduct “a thuggish tactic aimed at scaring people”.

However, Wonga escaped charges and other penalties because the FCA began policing payday lenders only in April this year and the practices uncovered were from 2008 to 2010. Nor could it be accused of the offence of impersonating solicitors because the letters avoided using the word solicitor.

Wonga has meanwhile lost the Church of England’s investment. The church suffered embarrassment last year when the Archbishop of Canterbury, the Most Rev Justin Welby, criticised payday lenders and pledged to force Wonga to close by encouraging credit unions. Welby then discovered the church held a £75,000 Wonga stake through an investment fund. The church has now withdrawn that stake as part of its venture capital portfolio.

A little earlier the church produced new guidelines restricting to 10% its investments in businesses trading in products of which it disapproves, such as the Tesco supermarket chain, which sells tobacco. The previous limit was 25%.

The FCA issued the Wonga compensation order while formulating new rules for payday lenders, to be implemented in January.
These measures limit daily rates to 0.8% and will cap default charges, probably at £15, and nobody will repay more than twice the amount borrowed.

The monthly interest on £100 will therefore be restricted to £24, compelling many lenders to cut rates. At present Wonga charges £37.15 and The Money Shop £29.99.

The FCA expects the policy will shrink the payday loan industry. Lenders predict more people will resort to loan crooks.
Richard Lloyd, executive director of Which?, the consumers’ pressure group, welcomed the measures: “It’s good to see the regulator tackling the eye-watering cost of payday loans, especially the excessive default charges that sting struggling borrowers and lead them into spiralling debt.

“Payday lenders have been running wild for too long and the FCA must keep them on a tight leash to protect consumers. The cap on the cost of loans should be kept under review and tightened up further if it doesn’t work as intended.”

Mark Littlewood, director general of the Institute of Economic Affairs, which observes markets and the economy, had reservations: “Having the regulator set maximum interest rates and penalties for late payment will freeze out the most needy from the credit market.

“Payday loan companies will no longer be willing to lend to those judged to be at a fairly high risk of defaulting. As has been the experience in other countries, we can now expect more of them to turn to often viscous loan sharks that operate entirely outside the law.”

The FCA debated capping other costly credit but shelved a decision. Instead it is reviewing credit card practices, personal bank accounts and overdrafts, which can be expensive if unauthorised. Observers predict curbs in the autumn.