Within weeks of joining the FT staff in January 2011, I saw a colleague doing something on her computer screen that shocked me. She was applying for a payday loan.
I didn’t know what to say. But she freely admitted: “I have to pay the children’s nanny and we don’t get paid until next week.”
Her cash flow crisis had resulted from the combination of Christmas and the eye-watering cost of childcare in the capital. A few clicks later, she had several hundred pounds in her account. But I was surprised she was so blasé about using such a costly form of credit.
In those days, payday lenders such as Wonga didn’t like being described as such. They were fintech companies, digital innovators, disrupting the “old” model of waiting on the phone to ask your bank for an overdraft or higher credit card limit.
Young professionals needing loans for a few days were the clients they liked to boast about. Yet financial regulators found that too many payday customers simply could not afford the high-cost credit they were being advanced. Nor was it short term, as many “rolled over” loans with four-figure equivalent annual interest rates and ended up owing several times the amount of the original loan in interest and charges.
Four years ago, the Financial Conduct Authority (FCA) capped the cost of payday loans, ruling that fees and interest could never exceed the original loan amount. This regulated many payday lenders out of existence. Wonga’s profits were hit, but its scale meant it survived — though its future now hangs in the balance.
This week, Wonga stopped taking fresh loan applications while it “continues to assess its options”, which could involve going into administration.
Ironically, its downfall is being blamed on another group of financial companies renowned for sharp practice, the claims management industry.
You may be familiar with texts and spam calls asking “Have you had an accident which was not your fault?” or “Were you mis-sold PPI?” Those with a chequered credit history are also likely to be asked: “Were you granted an unaffordable payday loan?”
Following the FCA clampdown, it is possible for consumers to argue that payday lenders failed in their duty of care to check that borrowers could afford the repayments.
Claims are handled by the Financial Services Ombudsman (FOS). It received 10,979 new complaints about payday loans between April and June, up from just 3,126 in the same period last year.
The FOS said the “vast majority” of claims concerned the affordability of loans, and that about 56 per cent of complaints are being decided in favour of the customer. Compensation can include refunding interest, charges and sometimes even the original loan amount.
The FOS confirmed it charges Wonga and others a £550 administration fee per complaint, regardless of the outcome.
As claims management groups and debt campaigners encourage more people to come forward, the costs have spiralled. Wonga’s financial difficulties, which first came to light about four weeks ago, has prompted a further rush.
The FOS says that if Wonga does go into administration it will stop accepting fresh compensation claims and any customers who are subsequently awarded compensation will be likely to join the list of creditors. It also confirmed that protection from the UK’s Financial Services Compensation Scheme would not apply in such circumstances.
At the time of writing, Wonga is still trading and its website stresses customers must keep up repayments on their loans. If the company collapses, industry experts expect administrators to sell on the loan book, so there’s little hope of debts being written off.
It is not unusual for consumer loans to be parcelled up and sold on to privately owned debt-buying companies, many of whom specialise in the subprime sector. They can buy bad debts for as little as 5 pence in the pound, meaning a £1,000 loan where the borrower has defaulted could be purchased for just £50. Then, the new owner of the debt can legally chase the borrower for repayment and may use more aggressive recovery tactics, such as sending in the bailiffs.
Debt campaigner Alan Campbell says he hopes the liability of future claims against payday lenders will be passed to anyone who purchases loans.
He is in the process of setting up Final Notice, a new not-for-profit campaign group to educate payday customers who are granted unaffordable loans about their consumer rights.
“If just 100,000 people complain to the FOS about how they were treated, it would cost the payday lenders £55m alone, win or lose, threatening the very existence of the high-cost lending industry itself,” he says.
This begs the question — what would fill the space? The FCA has also clamped down on bank overdraft charges, and from September, lenders will be obliged to contact credit card customers who only make the minimum payment with a view to nudging up the monthly amount. There are fears those with poor credit history could be driven towards back street loan sharks.
Others argue that if the indebted run out of options, this could be the trigger for seeking debt advice. More than 8m people in Britain are estimated to be struggling with problem debts, yet only 1m are formally being helped by free debt advice providers such as StepChange and PayPlan.
Last week, those two groups told me they expect demand to soar over the next 12 months. However, their vital work is being compromised by the refusal of many third-party debt buyers to pay the voluntary “fair share” levy that funds free debt advice. PayPlan says these traded-on debts now account for the biggest proportion of cash collected under client repayment plans.
If they keep refusing to pay up, it’s the regulators who will need to send in the heavies.
Date published: 30 August 2018
Word count: 972
Claer Barrett is editor of FT Money. Email: firstname.lastname@example.org; Twitter: @Claerb
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