(Pay)Day of Reckoning for Wonga
10 September 2018
The news that payday lender Wonga has entered administration may not come as a surprise to those who have followed the recent performance of the company. It suffered a rocky few years at the hands of a scandal prompted by the discovery that the company was issuing fake legal letters to customers, tightened regulation of payday loans by the Financial Conduct Authority (“FCA”) and a deluge of compensation claims over improper sales practices.
Even before the collapse of Wonga, the golden age of the payday lender was drawing to a close. In 2017, the payday loans industry in the UK was valued at around £220 million, compared to £2.5 billion in 2013. The introduction of the FCA as industry regulator in 2014 saw the market contract significantly, largely as a result of the “payday loan price cap” which took effect from 2 January 2015 and limits the cost of interest and fees levied by lenders to 0.8% a day.
A review of the high-cost credit market by the FCA carried out in March 2017 provided “clear evidence that FCA regulation of high-cost short-term credit (often known as ‘payday lending’) has delivered substantial benefits to consumers”
(https://www.fca.org.uk/news/press-releases/agenda-...). Nonetheless, despite tighter and effective regulation, payday loans remain controversial – politician Stella Creasey and actor Michael Sheen are but two of the more high-profile campaigners against the practice - on the basis that the market is said to target vulnerable people who might not be able to access other forms of credit. Typically, a borrower pays £2.50 in interest and charges for each £1 they borrow (Moneybox, Radio 4, broadcast 1/09/2018).
It is widely acknowledged that payday lenders serve to fill a gap in the market – so what is the alternative? Credit unions have been increasingly targeting people of all incomes and many have branched out into current accounts, mortgages and other products and have benefitted from the strong support of the government, local councils and churches.
Official figures from the Bank of England published at the end of August 2018 suggest that the diversification and endorsement is paying dividends. The UK’s credit union membership has passed the two million mark for the first time and between 2007 and 2017 doubled in both membership and loan growth. Whether expansion will continue at this rate remains to be seen.However, commentators will be watching with great interest for indications that credit unions will retain or even increase their unprecedentedly substantial market share.