Were they right, or Wonga?

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Wonga, the UK’s largest pay day lender, provides customers with short term loans of small amounts of money for very high levels of interest.  The interest charged by the lender may lead to an APR in excess of 5000%.  The controversial company has come under increasing pressure in recent months following a string of unfavourable revelations and ever stricter regulation, particularly for enabling vulnerable people to take on debts which they cannot afford.  The company has done little to discourage this practice, as unlike traditional lenders, the company does not do checks on the incomes or outgoings of customers.  They were also the first of a succession of businesses to be revealed as sending letters from ‘fake’ lawyers to customers in June this year, threatening legal action over unpaid debts.  The Financial Conduct Authority ordered the company to pay £2.6 million in compensation to 45,000 customers.

More recently, the UK’s FCA ordered earlier this month that Wonga must write off the debts of 330,000 customers.  The customers whose debts will be written off are those who are more than 30 days in arrears, who would not have qualified to take out the loan under new regulation.  This measure will cost the company £220 million.  Additionally to this, a further 45,000 would be required to repay their loan without interest or charges, which will cost another £35 million in costs.  The FCA plans to introduce a cap on the cost of credit at the beginning of 2015, at a maximum interest rate of 0.8% per day.  The measures are thought to have the potential to put up to 99% of pay day lenders out of business.

Also this month, a Wonga television advert was banned for failing to include the interest rate charged by the company.  The Advertising Standards Authority took the action after a complaint from Citizen’s Advice, which calls for payday lenders to be properly regulated and to “stop irresponsible advertising,” as specified on their website.  The ASA agreed that the advert contradicted regulation by failing to state the interest rate and banned the clip from appearing on TV in its current form.  In April this year, another Wonga advert had been banned for confusing the public about their interest rate policy.  In July, the ASA also banned adverts from several other payday lenders for similar reasons.

This blatant issue of transparency is set to be addressed.  Under new rules put forward by the Competition and Markets Authority, the Investigation Group want to ensure that vulnerable customers receive more clear information on the risks which are involved with the loans, so fewer can be misled by those selling the product.  Wonga and other pay day lenders will also have to compete on price, to avoid the cap on credit cost from becoming “a going rate” for the companies.  Under the suggested rules, pay day lenders will have to make comprehensive details of their loans available on price comparison websites. The Chair of the Pay Day Lending Investigation Group of the CMA, Simon Polito, claimed there is little transparency on the cost of credit by pay day lenders and so little incentive to compete on price.  The proposals aim to keep prices as low and competitive as possible for the 1.8 million people in the UK who use pay day lenders.

The industry has been subject to criticism for some time and in the past month much of this has been addressed by various agencies.  Some commentators have expressed that the current difficulties and expanding regulation facing Wonga and the wider sector have the potential to remove “99 per cent of the industry to leave only the biggest operators”.  The issue of transparency and the ethics of the company have been at the centre of the debate.  Some have instead taken aim at customers who failed to correctly gather information on the loans before taking them out.  However, the regulation seeks to address the issues around the tendency of such companies to mislead customers and to increase competitiveness in an otherwise exploitative industry; a necessary move.