> Posted by Jeffrey Riecke, Communications Associate, CFI
Wonga, the U.K.’s largest payday lender, is forgiving £220 million in loans from 330,000 clients in arrears. Another 45,000 Wonga clients on precarious financial footing will no longer have to pay interest on their active loans. The news came last Thursday after talks between Wonga and the U.K. regulator, the Financial Conduct Authority (FCA), which culminated in Wonga instilling new, and reportedly urgently needed lending affordability checks. The forgiveness measures are intended to cover clients that wouldn’t have been given loans under the new affordability measures. They follow what has been a controversial rise for the lending firm and suggest where the U.K’s payday industry may be headed.
Wonga, which currently lends to about a million clients a year, has incurred complaints in the past for its lack of affordability checks, high interest rates, unscrupulous debt collection practices, and misleading advertising. Those speaking out against the firm include politicians, trade unions, and public demonstrators. Even Archbishop of Canterbury Justin Welby once stated that he would “compete [Wonga] out of business” through the launch of a Church-backed group of credit unions.
Wonga’s advertising campaigns have featured “mom and pop” character puppets, as well as sponsorship of the Newcastle United football club which entitled Wonga’s logo to appear on the players’ jerseys. Both initiatives incited criticism that the firm pushed loans to younger clientele. At the time of the agreement with Newcastle, the leader of the Newcastle City Council stated that he was “appalled and sickened” that the club signed the deal. Wonga’s advertising received a setback in April of this year when a regulator forced a campaign to be cancelled in which viewers were misled on interest rates.
On collections, last June the FCA revealed that Wonga sent thousands of fake legal letters to clients in the attempt to scare them into paying. The regulator ordered Wonga to offer redress to the roughly 45,000 clients affected.
In the media frenzy following last Thursday’s announcement, the firm’s critics have not been soft spoken. Online news site TechCrunch wrote, “No, that’s not disruptive business behavior. It’s plain old loan sharking.” Forbes wrote, “If Wonga can transform itself into a responsible short-term lender, it may for the first time provide a useful public service.” Member of Parliament (MP) Pat McFadden, who serves on the Commons Treasury Committee said, “These findings drive a coach and horses through the claim that Wonga has been lending responsibly.” Fellow MP on the Treasury Committee John Mann said, “I welcome today’s latest step to crack down on irresponsible payday lenders… This is a company that has taken advantage of people in dire financial circumstances.”
What’s happened with Wonga suggests the possibility of sweeping changes for payday lending in the U.K. Though Wonga’s new affordability checks are reportedly voluntary, the director of supervision at the FCA stated that the proceedings “should put the rest of the industry on notice” in terms of lending affordably and responsibly. In July of this year, the FCA announced that it plans to cap the interest rates payday lenders can charge as well as the number of times loans may be rolled over. A recent review of the industry revealed that the average annual salary of a payday loan recipient is roughly £16,500, well below the median in the U.K. of £26,500. Moreover, payday borrowers are often already heavily indebted.
Of the larger industry, MP Stella Creasy recently said, “Wonga is not the bad apple – the industry is a rotten barrel.” Gillian guy, Chief Executive of the nonprofit Citizens Advice said, “A lack of checks by lenders is setting a debt trap for borrowers. It is a widespread problem within the industry. Citizens Advice has found that in half of payday loans cases reported to us, lenders didn’t ask about people’s personal finances.” Industry advocates, such as the Centre for Responsible Credit, are campaigning for similar reforms for other payday lending firms.
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October 8, 2014 at 1:53 pm
Hugh Sinclair (@MFheretic)
I assume it has not escaped the attention of the CFI that there are certain similarities with the Wonga case and the microfinance sector. Over-indebtedness has led to periodic crises across entire microfinance sector (e.g. Nicaragua) and is currently a serious concern in Mexico and Peru to name but two countries. Aggressive debt collection methods were a cornerstone of the Andhra Pradesh crisis. Excessive interest rates have blighted the microfinance sector for decades, as most famously summarised by Yunus: “I never imagined that one day microcredit would give rise to its own breed of loan sharks”.
On the other hand, we see that such abuse, leading to formal FCA intervention, is possible in a supposedly well-regulated country such as the UK. How much more likely is this to occur in the opaque, largely un-regulated countries in which much microfinance takes place?
The closest thing we have to a self-regulator in the sector currently is Smart (owned by Accion, who run this blog). They have just awarded Smart certification to Banco Compartamos, one of the most vilified institutions in the sector, coincidentally an investment of Accion. Yunus described Compartamos as “screwed up”, and the bank has been widely accused of profiteering from the poor to benefit certain individuals and institutions (including Accion). So, while the UK is suggesting that regulation perhaps should be tightened up regarding financial services to the more vulnerable members of society, the microfinance sector has made feeble progress in precisely this regard. Self-regulation “doesn’t really work” suggested Yunus in the MicroCredit Summit conference in Mexico recently. Of course it doesn’t, neither in Mexico nor in the UK. So why, as a sector, do we put up with such watered-down window-dressing activities such as Smart? Is that all we can come up with after 30 years?
October 11, 2014 at 9:26 am
John Gitau
Accion and Smart Campaign, in the bet game between you and Hugh, heads he wins, tails you lose. Did you, Accion and Smart ever claim the status of Caesar’s wife; that gives Hugh the stones to throw at your glass houses as he drives your hired car looking at the rear mirror?
It is depressing to realize that we in this financial inclusion community mourn louder than the bereaved. The poor, who hardly read what we write about them and for them would laugh at what we say and would be bemused by our fights for resources around them. Aren’t they pawns in this game for financial resources? We raise so much dust in our intellectual competition based arguments where we want to show our colleagues how much we know, how wrong they are and how absolutely right we are. But non of this puts food on the tables of the poor in their hovels, though, well, it does on our tables, doesn’t it?
When all is said and done, the worst for us is self cannibalism. Of what value is it when we humiliate others who never claimed infallibility in the first place? If we do have a common agenda to uplift the poor from their neglect by governments in the unfair distribution of resources, I think we can do that better by appreciating one another’s effort, and when we fall, as sure we shall, it is integrity to extend a helping hand than to ridicule and smear mud!
Enough of preaching from “Father” John.
October 12, 2014 at 12:19 pm
Hugh Sinclair (@MFheretic)
“Father” John, thank you for your comment. Regarding whether our actions put food on our table, I did a blog post examining salaries at Accion. The top 11 executives earned a combined remuneration of over $5m according to their 2012 990 Form. That’s a lot of food for alleviating poverty, and it is not hard to see where these funds originate – interest paid by the poor. That these same people are apparently protecting the clients of this sector is utterly ludicrous. You speculate that we have a “common agenda to uplift the poor”, but I would propose that this is precisely what we, as a sector, are lacking. There are exceptions, but self-preservation and profit are the key drivers, and the Smart Campaign is a cleverly conceived ruse to give the deliberate impression to the outside world that the sector is taking steps to address the mounting criticism against it, while actually doing nothing and allowing the same olf profiteering activities to continue. Their rating of Compartamos is the definitive example. Again, acknowledging notable exceptions, I think you need to re-assess this idea that microfinance is predominantly about helping people. It is not. It is about helping ourselves, and the list of salaries at Accion presents objective data confirming this.
I do not “appreciate the effort” of Smart or Accion – I lament it, and I am not alone. Yunus doesn’t seem too impressed with them! How many people are willing to openly state that they promote interest rates of 200%, 300% etc., that are common in this sector? How many disagree with the IFC and believe that endlessly expanding the informal sectors of many countries is a wise idea? Who still believes that microfinance is the miracle cure we were told it was? Instead we sit idly while the next collapse looms – will it be Mexico or Peru? Or Ghana? Does it matter – this is merely part of the inevitable cycle of the sector, the order doesn’t really matter! We need to identify the cause of the problem and tackle it, rather than dance around tinkering with the symptoms in a half-hearted way.
Regarding client protection the problem is clear: wolves have designed a meaningless structure to guard sheep. We need to do two things: 1) replace the wolves, and 2) build a meaningful system. Anything else is mere window-dressing.
Regulation is not perfect, as the Wonga case demnstrates (or the recent financial crisis). But respect to the regulators for acknowledging a problem and doing something about it. These are the sorts of regulators this sector needs, and countries such as Ecuador demonstrate that such regulation is entirely possible, and does NOT drive out all prviate capital and force the poor back into the hands of the evil moneylenders as the anti-regulation folk suggest. But meaningful regulation reduces profitability, and those that profit from such activities are the least likely to support regulation, and the most likely to favour a watered-down effort such as Smart.
http://blog.microfinancetransparency.com/generous-or-excessive-salaries-at-accion/