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 looks as if his prayers may have been answered.
CFO Lending, which was fined £34m this week by the Financial Conduct Authority, is just the latest operator brought to its knees by regulators punishing bad lending behaviour. CFO, which traded under brand names Payday First, Money Resolve and Flexible First, will have to hand money back to nearly 100,000 victims of its unfair practices.
Citizens Advice said complaints about payday loans have collapsed by 86% between 2013 and 2016. But campaigners warn that the industry is reinventing itself with still “eye-watering” interest rates on three-month loans aimed at people earning less than £20,000 a year on insecure work contracts.
The regulatory assault on payday lending, which began in earnest in summer 2014, has forced more than 1,400 companies out of the industry, while those that survive are nursing large losses.
Wonga, easily the biggest player in the market, was forced to write off £220m of loans in October 2014, while the second biggest, Dollar Financial (owners of The Money Shop), was ordered to refund £15.4m in the same month to 147,000 customers after regulators found it was lending more to borrowers than they could afford to repay.
Earlier this year, another big player, Cash Genie, went into liquidation after being hit by a £20m compensation bill. “Approximately 38% of the 2013 market participants have left the market and therefore can no longer mistreat consumers,” said Citizens Advice in a review of payday lending earlier this year.
Crucially the regulators introduced a cap on interest rates in January 2015 and stamped down on companies raiding bank accounts several times to grab money on pay day. The measures have sent loan numbers tumbling.
The industry’s peak years were 2012-13, when around 10m to 12m payday loans a year, worth nearly £4bn, were being taken out.
But after rates were capped, the number of loans made by payday companies fell from 6.3m in the first half of 2013 to just 1.8m in the first half of 2015, according to the Financial Conduct Authority.
Carl Packman, who has researched payday lenders for the poverty charity Toynbee Hall, said: “It’s not really the case of the rise and fall of the payday lenders. It’s the rise, a hiccup and probably another rise to come. They are shifting to slightly longer two or three-month loans, which are still extortionately priced. The fact they have been able to pay these fines shows they are not just scraping by. There is still a lot of money going through their books.”
The rate cap limits interest to 0.8% a day and no one can repay more than 100% of what they initially borrowed. But even under the new rules, the annualised rate of interest that Wonga charges on a £100 loan is 1,509% – although that’s down from its 5,853% peak.
The Money Shop, whose chain of high street outlets has more then halved from its once 500-strong network to just 230, charges an annualised rate of 709% on a £250 loan repaid over four months. It said it is modernising its stores and expanding some of them.
But what has happened to the desperate borrowers once hooked on short-term loans? There is little evidence, yet, that legal doorstep lenders such as Provident Financial have picked up much of the business, or that illegal loan sharks have flourished.
Some people have simply stopped borrowing, said Packman, but others have gone into deeper arrears on rent and utility bills. He points to a steep rise in bailiff orders by councils in recent years.
Sara Williams, a Citizens Advice adviser, says other forms of high cost credit such as “logbook loans” (money secured against the borrower’s car), guarantor loans and doorstep lending can be just as problematic for the borrower. “The worst excesses of the payday loan industry have gone”, she said, “but checks on a borrower’s ability to repay are in some cases still inadequate as recent Citizens Advice research shows.” Her blog site, Debt Camel, helps victims of payday lending obtain refunds, without having to go through a claims management firm. Some people who have borrowed every month for years have recovered thousands in interest paid.
The trail of misery left by the payday lending boom is showing up in complaints to the financial ombudsman. Earlier this month it said that WDFC, the parent group of Wonga, was the subject of 821 complaints, up from 361 in the same period of 2015, while Instant Cash Loans received 285 complaints.
The industry insists it has reformed. Russell Hamblin-Boone, of the Consumer Finance Association, which represents around 75% of payday lending firms (although not Wonga), said: “The payday market is unrecognisable today from a few years ago. There are no rollovers, no cold-calling, no aggressive collection tactics and stringent customer affordability checks. Short-term lending now stands as a viable alternative to the mainstream credit market.”
Payday loans – a timeline
2006 Payday loans first made their presence felt in the UK. They were developed and marketed as one-off loans for unexpected expenses or luxury items but in reality were mainly used to fund everyday expenses such as groceries, bills and the costs associated with owning a car, according to the charity Citizens Advice. In 2006 a total of £330m was lent to individuals – but over the next few years the industry enjoyed explosive growth.
2007 Wonga launched in the UK and within a few years had become the sector’s best-known name, helped by a blizzard of advertising, including several football-club shirt deals.
2009 The total amount lent in the UK by payday lenders reached £1.2bn.
2010-11 Anger starts to build against “legal loan sharks” with Stella Creasy, a Labour MP, leading the charge. “Companies like Wonga are taking advantage of a perfect storm in consumer credit, where more and more people are struggling as the cost of living soars and mainstream banks withdraw from the market,” she said.
2012-13 The industry’s peak years, when 10m to 12m payday loans a year were being taken out. In 2012 the amount lent hit £3.7bn – more than 10 times the figure in 2006 – and in 2013 it stood at £2.5bn. In June 2013 Wonga raised the standard interest rate quoted 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 “compete” it out of existence as part of its plans to expand credit unions. But in September 2013 Wonga revealed that during 2012 it handed out nearly four million loans worth a total of £1.2bn to one million customers.
2014 An annus horribilis for Wonga and the industry. In May the City regulator laid into some companies’ misleading adverts and in June Wonga was ordered to pay more than £2.6m compensation after it was found to have sent threatening letters to customers from fake law firms. The following month the company axed the controversial cuddly puppets used in its TV adverts. Also in July the City regulator proposed a shake-up of the industry, The Money Shop agreed to hand back more than £700,000 to customers after it admitted breaking its own rules and Cash Genie said it may have to compensate customers after uncovering a string of problems. In October Wonga was forced to write off £220m of loans to 375,000 borrowers.
2015 In January price caps on payday lenders took effect. Interest and fees on all high-cost short-term credit loans were capped at a daily rate of 0.8% of the amount borrowed. If loans are not paid on time, default charges must not exceed £15. In addition the total cost including fees and interest is capped at 100% of the original sum. The caps mean someone borrowing £100 for 30 days and paying it back on time will pay no more than £24 in fees and charges. In May Wonga relaunched itself with new TV adverts aimed at a more middle-class audience. In October Dollar Financial UK, with brands including The Money Shop, was ordered by regulators to refund £15.4m to 147,000 customers. And in November it emerged that QuickQuid and Pounds to Pocket were to write off more than 2,500 loans to customers and refund almost 1,500 people following regulatory action.
2016 In January it emerged that Cash Genie had gone into liquidation. In May Wonga said it saw its losses more than double in 2015: it reported a pre-tax loss of £80.2m for the year. In July Google started banning some payday loan adverts and said that in the US it was outlawing ads for loans with an APR of 36% or higher. This week payday firm CFO Lending said it had agreed to pay more than £34m in redress to more than 97,000 customers for unfair practices.