Wonga has been caught out. But why didn’t the regulator act earlier?

If the regulator had been firmer before then some borrowers might not have been treated unfairly.

If the regulator had been firmer before then some borrowers might not have been treated unfairly

The payday lending industry has received an extraordinary amount of attention in recent times, mostly because week in week out there’s another scandal: selling loans to drunk people, raiding bank accounts of teenagers etc. Today is Wonga’s turn again: sending letters to customers in arrears from fake law firms.

This has major implications for the company. They have now had to ‘enter an agreement’ whereby they will pay out over £2.6m in compensation to around 45,000 customers. Last year they recorded profits of over £1m every week, so don’t weep too hard, but what matters is reputation: this is yet another big knock to that.

Between October 2008 and November 2010 Wonga was sending letters to customers from ‘Chainey, D’Amato & Shannon’ and ‘Barker and Lowe Legal Recoveries’, that led customers to believe their outstanding debt had been passed to a law firm. Wonga knowingly added an extra level of pressure on people who are in serious debt.

Click on the Wonga website and you will see their commitments to ‘responsible lending’: ‘We place emphasis on building a responsible and trusting relationship with you’. Customers will be asking themselves can we really trust a company that lies to such a serious degree?

Payday lenders in the UK are not a unified group, they compete dirtily with each other; since the extra focus the industry has been given by the government (trying hard to reflect the public disquiet of such companies) payday firms have been trying to implicate their competitors as the ‘bad apples’ rather than take the blame themselves.

Wonga in this regard are no different: another part of their website is called ‘Choose Wonga over getting a quick quid’. The implication for those who know the market is obvious: Quick Quid are another payday lender operating in the UK, a subsidiary company of Cash America International, Inc. Choose Wonga, we are ‘unlike other short term lenders’.

But this is so much hot air, and today’s news shows it. As Clive Adamson, director of supervision at the Financial Conduct Authority (FCA), which regulates payday loans, has said today: “Wonga’s misconduct was very serious because it had the effect of exacerbating an already difficult situation for customers in arrears.”

Another issue that comes to light today, relating to an admission by Wonga to the FCA in April this year, is its discovery of systematic errors relating to the calculation of the amount owed by customers. The FCA has pointed out that Wonga’s method of calculating interest and balance adjustments from fees has not be consistently applied, which means borrowers may have been paying back sums they didn’t need to.

It’s worth reminding ourselves of something former chief executive Errol Damelin said during an interview in 2012, which touches on the clarity of how much people are paying and the generally uncomplimentary attitude Damelin had for his former competitors:

“He says he does ‘have issues’ with how a lot of companies in the short-term lending industry, which includes pawnbrokers, payday and doorstep lenders, lend money. These include a lack of transparency on costs and terms, the rolling over of loans, resulting in the borrower owing huge amounts, and keeping people in permanent debt.”

It should be noted that Damelin has stepped down now as chief executive of the company. In November 2013 he indicated to the company’s Board that he wanted to begin an orderly exit from the company, but only quit earlier this month. Niall Wass joined the company in January 2013 as chief operating officer and took over as CEO when Damelin stepped down; he himself quit last May after a period of heavy criticism. Did they know this day would come?

What remains a mystery is why the Office of Fair Trading (OFT), who has known about Wonga’s debt collection methods since 2011, didn’t punish the company sooner. A story appearing in the Guardian in 2012 points out that:

“The OFT said it [Wonga] had seen letters sent out to borrowers who were struggling with repayments suggesting they may be guilty of fraud, and that Wonga would consider contacting the police if the customer did not act as it requested.”

While it is good that Wonga has finally been caught up and dealt with, clearly if the regulator had been firmer before then at least some borrowers might not have been treated unfairly.

Of course this speaks to a wider problem: is the problem of payday lending one of a few bad apples or is it widespread? I think today’s news shows the latter is the case. More support then for the Archbishop in his campaign to outcompete the likes of Wonga out of business.

Carl Packman is a contributing editor to Left Foot Forward

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