Britain Strikes a Blow Against High-Flying Payday LendersBy
Payday lenders, purveyors of high-interest, short-term cash advances to working people, aren’t known for their humility. Britain’s largest payday lender, Wonga Group, was no exception. Only a year ago, its advertising was plastered everywhere from double-decker buses to soccer fields. Its founder was mulling a stock market listing and raking in investment from Silicon Valley as he talked about expanding to the U.S.
Wonga has fallen to earth with a thud. The company plans to write off £220 million ($356 million) in loans to 330,000 customers, Bloomberg News reported on Thursday, following a crackdown by British consumer-protection regulators.
Wonga’s founder, Errol Damelin, was famously unapologetic about the payday-lending business, despite complaints in the British press that he was a “high-tech loan shark.” Damelin left the company in June, and its current leadership sounds positively contrite. “The need for change at Wonga is real and urgent,” Chairman Andy Haste said in a statement today. “Our regulator is determined to improve standards in consumer credit, and I share that determination.”
Wonga (the word is British slang for money) also has agreed to pay £2.6 million to compensate customers for unfair and misleading debt-collection practices, which regulators said included letters from fake law firms threatening to sue customers who fell behind on their payments.
Britain’s Financial Conduct Authority has been investigating the payday loan business since a survey last year found that borrowers were often pressured to extend their loans and weren’t being informed of the risks they were taking on. Under new regulations, payday lenders must verify that customers can afford to repay the money they are borrowing. The Wonga write-off announced on Thursday is to cover past-due loans to customers who wouldn’t have qualified under the tightened standards. “This should put the rest of the industry on notice,” Clive Adamson, the FCA’s director of supervision, said in a statement. “They need to lend affordably and responsibly.”
Efforts to rein in payday lending in the U.S. have moved slower than in Britain. Eighteen states and the District of Columbia have enacted laws to limit payday lending, according to the Consumer Federation of America, which says such loans typically carry annual interest rates of about 400 percent. In Washington, the Consumer Financial Protection Bureau says it is considering whether to propose regulations on the industry.
British regulators are moving “very much in the direction we hope financial regulators in the U.S. will take,” says Tom Feltner, director of financial services at the Consumer Federation of America.
It’s not clear how British payday lenders can survive in a much-tougher regulatory environment. Wonga’s £220 million-pound write-off is a severe financial blow to the company, equaling more than two-thirds of its revenues in 2013. Wonga also says that about 45,000 customers who are less than 30 days in arrears will be given up to four months to repay without interest and charges. “There is much to do in order to make Wonga a sustainable and accepted business,” Chairman Haste said. “Today’s announcement is a significant step forward in that process.”