Controversial British lender Wonga has officially stopped taking new applications for loans as the firm collapsed into administration.
The payday loan provider voluntarily handed control over to an independent administrator following their inability to repay their own debts. Operations have been frozen until it is decided whether or not the company can be saved.
What happened to Wonga?
Wonga has long been the UK’s largest payday lender; holding a market share estimated at 40%.
However in recent years, the company has started to struggle financially, and last month said they were “considering all options” just a few weeks after Wonga’s shareholders invested more than £10 million to the firm an attempt to keep the firm afloat.
Wonga said this cash injection was needed to buffer the impact of the recent increase in compensation claims they have received. The company confirmed the vast majority of these customers were seeking compensation for loans taken out before tough new Financial Conduct Authority guidelines were introduced three years ago.
Why are customers seeking compensation from Wonga?
Wonga has come under a barrage of criticism for their lending behaviour before FCA regulations took hold in 2015. It was said at this time that the company offered disproportionately high-interest rates on their finance product and used marketing practices that unfairly targeted vulnerable borrowers – particularly with their infamous puppet TV adverts.
Other compensation claims come from Wonga’s “unfair” debt collection practices with the firm reportedly sending threatening letters from non-existent law firms to get borrowers to repay their loans.
Chief executive of Citizens Advice Gillian Guy said that “while many of these problems are from before 2015, people still come to us after being sold loans they cannot pay back because rules on affordability are simply not good enough.”
How was Wonga impacted by the FCA price caps?
A general manager of Cambrian Savings and Loans, Ann Francis, says that by collapsing into administration due to these complaints that “Wonga has reaped what it has sown.”
Francis further criticised the company’s business model which she believes was entirely based “on high-interest rates, penalty charges and some unfair debt collection practices. When the regulators clamped down the model was no longer as profitable.”
The ‘clamp down’ Francis refers to are the guidelines laid out for short-term lenders by the Financial Conduct Authority (FCA) in 2015. These price caps were introduced to protect borrowers from extortionate interest rates and fees that some lenders often opted for.
These rules include an interest cap of 0.8% per day, additional charges being limited to £15 for each missed payment (a so-called “default fee”), and the total amount a borrower is ever made to repay never costing more than 100% of the original amount borrowed.
If you were to borrow £200, the most you’ll ever need to pay the loan company in repayments, interest, and charges will never exceed £400 in total. While many lenders embraced the shift in responsible lending, Wonga – who previously charged interest rates upwards of 5,853% APR, found their business model struggling.
How has Wonga been affected?
The influx in compensation claims has caused chaos for Wonga’s operating finances. In 2014, the lawyer’s letter scandal resulted in Wonga being made to pay more than £2.6 million to almost 50,000 customers.
That same year, the company were also ordered to write off £220 million in debts and interest for 375,000 borrowers the courts believed should not have been accepted for credit. Because lenders are legally required to carry out thorough affordability checks of everyone that applies for a loan to ensure they can afford their repayments, Wonga came under close scrutiny for failing to do so – and they paid the price.
By 2015 Wonga was reporting losses of more than £80 million. While they improved somewhat in 2016, they still ended the year with a loss of close to £65 million.
The business planned to rebuild their profits and reputation through 2017 but they suffered a serious security breach; with cybercriminals stealing personal data belonging to more than 245,000 Wonga customers in the process.
What does all of this mean for Wonga’s customers?
Wonga has said in a statement that their “customers can continue to use Wonga services to manage their existing loans but the UK business will not be accepting any new loan applications.”
This comes after the firm confirmed they are in the process of assessing their options during their voluntary administration. It is still possible that Wonga may attempt to raise funds by selling uncleared debts to a third party, but this is yet to be decided.
Existing customers are still required to pay back their outstanding debt and interest in the meantime. The FCA is standing by to supervise the company and ensure these customers are treated fairly.
Borrowers encouraged to compare before taking out a loan
While Wonga may have struggled to cope with the introduction of FCA guidelines, a considerable number of lenders continue to provide loans responsibly.
Gillian Guy says that, since the price caps were brought in, Citizens Advice “now see half the number of payday loan problems that we did in the dark days before the cap on interest and charges, so we know this type of regulation works.”
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