The unpleasant and unethical excesses of the U.K.’s payday loans party are unravelling, as new regulator, the Financial Conduct Authority (FCA), gets to grips with the sector.
The latest being forced to make redress to wronged customers is Wonga (not for the first time this year either) — a moneylender that positioned itself as a technology startup with ‘fancy affordability algorithms’ that apparently allowed it to make decisions on who it could and couldn’t lend to in minutes.
Well, turns out those algorithms weren’t so fancy after all — given that today the company has agreed to entirely write off the debts of 330,000 customers who were more than 30 days in arrears, and to waive the interest rates and fees of another 45,000 between 0 and 29 days in arrears.
According to the BBC, the 330,000 written off debts sum to a total of £220 million.
Wonga is writing these debts off because it’s admitting its own affordability checks were inadequate. So much for its fancy technology.
In a statement on its website today Wonga notes:
We have been working closely with the FCA to agree additional requirements to our lending criteria, which have been implemented as of the 2nd October 2014 across our UK consumer loans service.
We have also today committed to a major customer forbearance programme for many existing customers whose loans would not have been made had they been subject to the new affordability criteria introduced today.
In another section on the new affordability lending criteria the company warns customers they might now be refused a loan, even if it has lent them cash in the past:
We only want to offer you a loan we believe you can afford. So even if you have been a customer before and have a good repayment history you may only be accepted for a loan less than you have borrowed in the past. In some circumstances we may not be able to offer a loan at all.
So, bottom line, Wonga’s business is shrinking because it was previously lending to people it should never have lent to in the first place — people who had a snowflake’s chance in hell of ever being able to pay it back — and then dining out on extortionate interest rates.
No, that’s not disruptive business behavior. It’s plain old loan sharking.
While Wonga’s agreement with the FCA today is technically voluntary, the regulator has the power to impose requirements on it — so agreeing to affordability changes now is simply a way of Wonga avoiding having changes forced upon it later.
The FCA said Wonga has put in place interim measures to test affordability, ahead of rolling out a new permanent lending decision platform that reflects the new tighter affordability criteria. There’s no ETA on when that will land as yet.
Commenting on the specific changes it is making to affordability checks, a Wonga spokeswoman told TechCrunch: “There are a series of wholesale changes — at the heart of it is much greater scrutiny of loan to income ratios. We’ve also got new credit policy rules in place that weren’t there before. For example, previously, people making late payments could immediately reapply — now they will face an automatic block for 30 days. Also, people who we decline for credit reasons will no longer be able to reapply immediately — they too will face an automatic block for 30 days. The combination of these changes means there’ll be a material drop in the number of loans we make.”
As part of the redress, Wonga has also agreed to appoint a skilled person to monitor its new lending decision platform and report to the FCA to provide an independent view of its activities. The hire will be agreed jointly between Wonga and the regulator, according to an FCA spokeswoman.
The FCA has been actively regulating the UK’s payday loans sector since the start of April this year, taking over from the Office of Fair Trading. Back in July another payday loans company, Dollar, agreed to tighten its lending criteria at the FCA’s behest, and pay back more than £700,000 in customer interest and charges.
In June Wonga was also forced to pay more than £2.6 million in compensation to around 45,000 customers after the FCA found it guilty of misleading and unfair debt collection practices. The company was found to have sent debt-collection letters to customers from non-existent law firms.
This summer the FCA also proposed a price cap on payday loans — estimating that payday lenders will lose £420 million per year as a result of the proposed changes.
The regulator is currently consulting on the proposals but it looks certain that a long overdue clean-up is on the way for a very grubby sector. And that can’t come soon enough.