Is the demise of Wonga a cause for celebration?
Wonga, the poster boy for the payday loans industry has collapsed, no one is shedding tears. The likelihood is that other similar firms will follow; the claims management companies will see to that, for them it’s good business. (see chart). There were more new cases to the Financial Ombudsman about payday lenders in the first three months of 2018/2019 than the entirety of 2016/2017. Haemorrhaging money you don’t have at a reported £550 per claim (the fee the lenders must pay to the Ombudsman) is unattractive to hard-nosed investors, especially when there appears no end to the potential liability.
The demise of payday lending brings very welcome relieve for hard-pressed households in the UK who previously paid significant premiums when borrowing from these firms. Wonga brought much on themselves. The egregious lending, especially pre-2014, is now inescapable. True, affordability assessments were different then, and the shift in borrower incomes was significant after the FCA took over regulation. Payday borrowers median net income rose after 2014 from £15,600 to £20,000.
Maybe Wonga thought their admission of guilt in 2014 would reset the pitch before new affordability rules came in. In a FCA press release they agreed to recompense around 350,000 customers. It didn’t draw a line.
The claims management companies, with only a year left before the deadline for PPI claims, have seen a new money-spinner. Payday loan companies are a less lucrative, but nonetheless significant revenue source. The templates are out there, the data purchased, people will receive calls, hear the ads, more claims will follow.
The rising new payday cases aren’t on a par with the PPI claims, (Lloyds had over eight times as many new claims as Wonga to June 30th) but there’s one big difference; banks have deeper pockets.
The most pertinent reasons for Wonga’s demise comprise a mixture of:
- Financial Conduct Authority (FCA) imposition of the payday loan cap from 2015
- FCA’s parallel tighter regulation and scrutiny including detailed affordability rules.
- Altered business models reduced the numbers (and profile) of borrowers, affecting revenues.
- High profile redress arrangements did not draw a line under past behaviour.
- The surge in claims management companies looking for new opportunities as PPI claims waned;
- Rules on consumer redress have no backstop
- Every claim costs the loans company time and money
- Investors will not invest in Wonga (or other lenders) in such circumstances.
- Wonga will not be the only company facing redress claims.
While the administration of Wonga and other lenders that shall follow will help consumers escape from this type of high cost lending it, this will not lead to a reduction in credit demand, just the supply of it. Consumers are seeking credit; unsecured lending to individuals reached a high of £213bn in 2018. Everyone ought to be concerned about the unintended consequences for those who cannot access credit. Concerns over illegal lending are, in my opinion, legitimate. There are some reasons to think it will rise:
- The FCA reported (Oct. 2017) that 3.6m people borrow from friends and family.
- Citizens Advice reported (Aug. 2018) that c£19m of priority debt is owed across the UK.
- There has been a significant rise in council tax, rent and utility arrears seen by debt charities. (Step Change in Scotland say that the percentage of their clients in arrears on their council tax, is now 45%, it was 18% in 2010).
- Household savings ratio was 4.1% in Q1 (2018), the average for the eight quarters before that was 5.35%, and the eight before that one was 9.05%.
Borrowing from family is finite, as is defaulting on your rent or Council tax. Councils and landlords are under financial pressure; they will collect their debts.
Carnegie UK Trust believe in sustainable, not-for-profit, affordable credit alternatives, that charge interest to cover costs (nothing more), and provide gateway services to other support services when a loan is not appropriate. The community finance sector is currently miniscule but that doesn’t mean it always has to be — and now surely is its moment to fill the vacuum left by payday companies with a more ethical, socially-driven, affordable alternative.
We are working with others to address the barriers social lenders face to growth, scale and sustainability. These are questions of loan capital, better marketing, and improved system.
Many social lenders find their mission sometimes is misunderstood, often because of the APR where their costs sound high. There is therefore also a PR job to be done to better explain the real, positive social impact of fair lenders like Conduit Scotland, Fair for You, Moneyline, Street, Scotcash and others. There’s a nice video about it which you can access here https://www.carnegieuktrust.org.uk/project/affordable-credit/ It’s also where you can read about the range of Carnegie UK Trust’s work in this area.
Better solutions exist, it may take time to support the scaling up of social lenders but until they are truly sustainable then it will be ad hoc solutions.
As Michael Sheen stated in his Metro article on August 28th “ the fall of Wonga, and others like them, can only be a cause for celebration if, at the same time, the fairer, more responsible credit providers are able to grow and meet the demand that so clearly exists”.
Originally published at https://www.carnegieuktrust.org.uk on September 18, 2018.
