The FCA have demonstrated both its intent and its muscle as it took a big bite out of the Payday Loans market. Wonga, by far the biggest payday lender in the UK market, has this month written off loans made to over 330,000 customers who were more than one month in arrears – these customers will walk away from their loan agreements owing Wonga nothing. In addition the UK Payday Lender will also write off all interest and charges for another 45,000 customers who will effectively just be asked to repay the sum they borrowed.
The move by Wonga comes as part of a voluntary arrangement with the FCA which also sees the lender being required to appoint an independent “skilled person” to monitor changes to their lending procedures and report back to the FCA. The “skilled person” will be one of the firms of auditors approved for the task by the FCA.
The cost of all this in written off debt alone comes to around £220 million – which is a huge amount of money, even by the standards of the UK’s biggest payday lender. That figure just accounts for the amount of debt on the books that the firm has written off but does not include any associated costs. Aside from the associated headaches such as footing the bill for the “skilled person” and non-payment of loans by unaffected customers who may be confused by the media headlines , the biggest costs to Wonga will undoubtedly be the impact on their ability to write future loans.
So what went wrong? Regular readers of these pages will be only to aware of the FCA’s intention to ‘clean up’ the unsecured loan market and one of their biggest areas of focus is ensuring that lenders are acting responsibly, particularly when it comes to being satisfied that their prospective customers can afford the loan that they’re applying for.
Wonga fell foul of the regulator because it couldn’t demonstrate that it went to reasonable lengths to check that the loan would be affordable for its customers. The lender had previously relied upon a ‘self-declaration’ approach from customers, which allowed customers to enter details such as their income online, without having to provide any supporting evidence before the loan was agreed. The practice is fairly common in the payday Loan market and is one of the reasons that Payday Lenders were able to offer loans within a matter of minutes from application.
However, all that looks set to change as the biggest player in the market has not only been forced to write off a fortune in loans but will now have to change its process to meet the regulations. The changes that Wonga will introduce aren’t yet clear but by its own admission the new approach would mean “accepting far fewer applications from new and existing customers” according to Chairman Andy Haste.
Whilst Wonga have grabbed all the headlines, and represent a notable success for the FCA, the regulator’s strategy is clear – they’ve gone after the biggest player in the market to send out a clear and unequivocal message to the rest of the market. The bar has been set and the other participants will have to hastily follow suit, although even that might not be enough to avoid the FCA taking a big bite out of their balance sheets to redress their past actions.