A look back at some of the recent turbulent history of payday loan company Wonga.
What is Wonga?
Wonga is a UK payday loan company offering short-term loans to its customers at high interest rates. It was originally founded by Errol Damelin, a South African entrepreneur, in October 2006. Wonga is authorised and regulated by the Financial Conduct Authority (FCA). Its recent history has been clouded by a number of controversies.
In July 2014, the Financial Ombudsman Service warned that complaints about payday lenders had doubled in the previous two years. In June 2014, Wonga was directed to pay £2.6m in compensation for “unfair and misleading” debt-collection practices. The practices were discovered after an investigation launched by the Office of Fair Trading and taken up by the FCA. In certain cases, Wonga had added charges to customer accounts to cover administration costs for sending erroneous letters. The failures occurred between October 2008 and November 2010. During that time, Wonga and other companies within its group pressured customers to make payments they could not afford. Customers received letters from companies named ‘Chainey, D’Amato & Shannon’ and ‘Barker and Lowe Legal Recoveries’, although neither firm exists. FCA director of supervision Clive Adamson said in June 2014: “Wonga’s misconduct was very serious because it had the effect of exacerbating an already difficult situation for customers in arrears. We are pleased that Wonga has been working with us to put matters right for its customers and to ensure that these historical practices are truly a thing of the past.” Wonga’s interim chief executive at the time, Tim Weller, apologised “unreservedly” for these particular debt-collection practices and the stress caused to customers as a result. Wonga eventually paid around 45,000 customers a total of £2.6m in compensation for the “misleading” debt-collection practices.
FCA intervenes – capped interest and fees, relending rates
In July 2014, the FCA announced plans to cap fees by payday lenders such as Wonga: this meant that payday lenders would not be allowed to charge more than 100 per cent of a value of a loan, while interest and fees were capped at 0.8 per cent per day of the amount borrowed. FCA chief executive Martin Wheatley said: “For the many people that struggle to repay their payday loans every year this is a giant leap forward. From January next year, if you borrow £100 for 30 days and pay back on time, you will not pay more than £24 in fees and charges and someone taking the same loan for 14 days will pay no more than £11.20.” The FCA predicted an income hit of £420m per year to the payday lending sector as a result of the new regulations. By December 2014, Wonga capped the costs of its payday loans at the maximum rate of interest allowed by the FCA (0.8 per cent, down from 1 per cent), also capping late payment charges at £15, the maximum allowed under FCA rules.
After taking over the regulation of consumer credit in April 2014, the FCA requested information about the volume of Wonga’s relending rates. The regulator said the information it received suggested that Wonga “was not taking adequate steps to assess customers’ ability to meet repayments in a sustainable manner”. As a result, Wonga entered into a “voluntary requirement” agreement that would see it make significant changes to its business model. By October 2014, it had been agreed that approximately 330,000 customers whom were then in excess of 30 days in arrears, would have the balance of their loan written off and would owe Wonga nothing. In addition, around 45,000 customers who were between 0 and 29 days in arrears would be asked to repay their debt without interest and charges and would be given an option of paying off their debt over an extended period of four months. This meant that Wonga took a £35m hit on loans worth £220m. Andy Haste, who had become Wonga group chairman in July 2014, said: “We want to ensure we only lend to those who can reasonably afford the loan in question and during my review, it became clear to me that this has unfortunately not always been the case. I agreed with the concerns expressed by the FCA and as a consequence of our discussions we have committed to taking these actions.” In the same month, Haste had launched a review of Wonga’s practices, including the affordability of its loans, its lending criteria and ensuring its advertising did not appeal to young people.
Recent financial performance
These measures took their toll on the company’s financial performance. Wonga reported a pre-tax loss of £37.3m for 2014 after taking the £35m customer remediation hit. Previous to this, the company had recorded pre-tax profits of £40m for 2013 and £85m for 2012. The firm’s full-year results for the 12 months to 31 December 2014, published in April 2015, revealed that revenues plummeted 31 per cent year on year, from £314.7m to £217.2m, driven by a “significant reduction” in UK consumer lending. Haste, by then Wonga chief executive, said in April 2015: “We said Wonga would be smaller and less profitable in the near term as we focus on creating a sustainable business that lends responsibly and transparently to customers who can afford to borrow from us.” These more straitened financial circumstances have continued into 2015 and 2016, with respective pre-tax losses of £80m and £65m being recorded. Wonga expected to return to profit in 2017. Tara Kneafsey, chief executive of Wonga, argued in September 2017 that since 2014 the company “had been transformed as we have expanded our product offering, strengthened our governance, rationalised our operations and reduced our cost base”.
The Church of England and Wonga
In July 2013, Archbishop of Canterbury Justin Welby said that he wanted to put payday lender Wonga “out of existence” through increased competition. Speaking to Total Politics magazine, the archbishop said credit unions had got to compete more with payday lenders. Welby, who sat on the parliamentary commission on banking standards, said he told Wonga founder Errol Damelin that he wanted his company to come under more competitive pressure. He said: “We’re not in the business of trying to legislate you out of existence, we’re trying to compete you out of existence. He’s a businessman, he took that well.” Unfortunately for Welby, it then transpired that the Church of England pension fund was investing around £75,000 in Accel Partners, the US venture capital firm that had led Wonga’s 2009 fundraising. By July 2014, The Church of England had severed its ties with the payday lender. Welby said in an interview with the BBC in July 2014: “I have been absolutely clear that I do not believe that the rates of interest charged by these companies [payday lenders] are ethical and moral — they are legal but they are not ethical or moral.”
The 2017 data breach
In April 2017 Wonga suffered a security breach, which was thought to have meant that criminals had stolen information from 245,000 of its UK customers. Wonga said at the time that it was “urgently investigating illegal and unauthorised access to the personal data of some of its customers”. The stolen information included names, phone numbers, addresses, sort codes and bank account numbers, although a Wonga statement said that password details had not been stolen. Initially, Wonga thought that breach was a failed hacking attempt.