In 2013, the Archbishop of Canterbury, Justin Welby, declared war on Wonga and other payday lenders, crucifying borrowers with 5,000% interest loans. Three years later, it appears his prayers have been answered.
CFO Lending, which was fined £ 34million this week by the Financial Conduct Authority, is just the latest operator to be brought to its knees by regulators punishing bad lending behavior. The CFO, which operated under the brands Payday First, Money Resolve and Flexible First, will have to hand over money to nearly 100,000 victims of its unfair practices.
Citizens Advice said payday loan complaints slumped 86% between 2013 and 2016 over insecure employment contracts.
The regulatory assault on payday lending, which began in earnest in the summer of 2014, has forced more than 1,400 businesses out of the industry, while those that survive suffer significant losses.
Wonga, by far the biggest player in the market, was forced to cancel £ 220million in loans in October 2014, while the second biggest, Dollar Financial (owner of The Money Shop), was ordered to repay £ 15.4million the same month to 147,000 customers after regulators found out he was lending more to borrowers than they could afford to repay.
Earlier this year another big actor, Cash Genie, was put into liquidation after being hit by a £ 20million compensation bill. “About 38% of the 2013 market participants have left the market and therefore can no longer abuse consumers,” Citizens Advice said in a review of payday loans earlier this year.
Basically, regulators introduced a cap on interest rates in January 2015 and cracked down on companies that repeatedly looted bank accounts to get money back on payday. The measures brought down the number of loans.
The industry’s peak years were 2012-13, when around 10-12 million payday loans a year, worth almost £ 4 billion, were taken out.
But after the rate cap, the number of loans made by payday companies fell from 6.3 million in the first half of 2013 to just 1.8 million in the first half of 2015, according to the Financial Conduct Authority.
Carl Packman, who researched payday lenders for the Toynbee Hall anti-poverty charity, said, “The rise and fall of payday lenders is not really the case. It’s uphill, a hiccup and probably another uphill coming. They are turning to slightly longer loans of two or three months, the prices of which remain exorbitant. The fact that they were able to pay these fines shows that they are not just getting away with it. There is still a lot of money flowing in their books.
The cap rate limits interest to 0.8% per day, and no one can repay more than 100% of what they originally borrowed. But even under the new rules, the annualized interest rate Wonga charges on a £ 100 loan is 1,509% – although it is down from its peak of 5,853%.
The Money Shop, whose big-box chain store has more than halved its once-500-person network to just 230, is charging an annualized rate of 709% on a £ 250 loan repaid over four months. He said he was modernizing his stores and expanding some of them.
But what happened to desperate borrowers who were once addicted to short-term loans? There is little evidence, however, that legal door-to-door lenders such as Provident Financial have taken over much of the business, or that illegal loan sharks have flourished.
Some people just stopped borrowing, Packman said, but others ran into even bigger rent and utility arrears. He underlines a sharp increase in bailiff’s orders by councils in recent years.
Sara Williams, a Citizens Advice advisor, explains that other forms of high-cost credit such as “logbook loans” (money secured against the borrower’s car), secured loans, and home loans can be equally problematic for the borrower. “The worst excesses in the payday loan industry are gone,” she said, “but controls over a borrower’s ability to repay are in some cases still insufficient, as recent research from Citizens Advice ”. His blog site, Debt Camel, helps payday loan victims get repayments without having to go through a claims management company. Some people who have borrowed monthly for years have recovered thousands of interest paid.
The trail of misery left by the payday loan boom manifests itself in complaints to the financial ombudsperson. Earlier this month, he said WDFC, Wonga’s parent group, faced 821 complaints, up from 361 in the same period of 2015, while Instant Cash Loans received 285 complaints.
The industry insists that it has reformed. Russell Hamblin-Boone, of the Consumer Finance Association, which represents about 75% of payday loan companies (but not Wonga), said: “The payday market is unrecognizable today compared to a few years ago. There are no rollovers, no canvassing, no aggressive collection tactics and tight customer affordability controls. Short-term loans are now a viable alternative to the traditional credit market. “
Payday loans – a timeline
2006 Payday loans first made their presence felt in UK. They were developed and marketed as one-time loans for unforeseen expenses or luxury items, but in reality, they were primarily used to finance daily expenses such as groceries, bills, and the costs associated with owning money. a car, according to the Citizens Advice charity. In 2006 a total of £ 330million was loaned to individuals, but over the following years the industry grew explosively.
2007 Wonga was launched in the UK and within a few years has grown into the best-known name in the industry, helped by a storm of publicity including several club soccer jersey offers.
2009 The total amount loaned to the UK by payday lenders reached £ 1.2 billion.
2010-11 Anger begins to escalate against “legal usurers” with Stella Creasy, a Labor MP, leading the charge. “Companies like Wonga are profiting from a perfect storm in consumer credit, where more and more people are struggling as the cost of living skyrockets and traditional banks pull out of the market,” he said. she declared.
2012-13 The peak years of the industry, when 10 to 12 million payday loans per year were taken out. In 2012, the amount loaned reached £ 3.7bn – more than 10 times the 2006 figure – and in 2013 it was £ 2.5bn. In June 2013, Wonga raised the standard interest rate shown on its website from 4.214% to 5.853% APR. The following month, it emerged that the Archbishop of Canterbury, Justin Welby, had told Wonga that the Church of England wanted to “do away with” her as part of its plans to expand credit unions. But in September 2013, Wonga revealed that in 2012, she made nearly four million loans worth a total of £ 1.2 billion to one million customers.
2014 An annus horribilis for Wonga and the industry. In May the city regulator filed deceptive advertisements from certain companies and in June Wonga was ordered to pay more than £ 2.6million in compensation after sending threatening letters to bogus customers. law firms. The following month, the company removed the controversial plush puppets used in its TV commercials. Also in July, the city regulator proposed an industry reshuffle, The Money Shop agreed to hand over more than £ 700,000 to customers after admitting to breaking its own rules and Cash Genie said it may have to compensate customers after discovering a series of problems. In October, Wonga was forced to cancel £ 220million in loans to 375,000 borrowers.
2015 In January, the price caps for payday lenders went into effect. Interest and fees on all high cost short-term loans have been capped at a daily rate of 0.8% of the amount borrowed. If the loans are not paid on time, the default fee should not exceed £ 15. In addition, the total cost, including fees and interest, is capped at 100% of the initial sum. The caps mean that a person borrowing £ 100 for 30 days and paying it back on time will not pay more than £ 24 in fees and charges. In May, Wonga relaunched with new TV ads aimed at a more bourgeois audience. In October, Dollar Financial UK, along with brands such as The Money Shop, was ordered by regulators to reimburse 147,000 customers £ 15.4 million. And in November, it emerged that QuickQuid and Pounds to Pocket had to cancel more than 2,500 customer loans and repay nearly 1,500 people following regulatory action.
2016 In January, it emerged that Cash Genie was in liquidation. In May, Wonga said she saw her losses more than double in 2015: she reported a pre-tax loss of £ 80.2million for the year. In July, Google began banning some payday loan ads and said in the United States it banned ads for loans with an APR of 36% or more. This week, the breakdown company CFO Lending said it had agreed to pay more than £ 34million in repairs to more than 97,000 customers for unfair practices.
