Never far from the headlines at the best of times, payday loan firms and their unscrupulous practises were dominating the news-stands again at the end of June. Just days after the Competition and Markets Authority (CMA) called for the introduction of a price comparison site to expose lenders charging extortionate interest rates, well-known provider Wonga was ordered to pay £2.6 million in compensation after sending fake debt collection letters to consumers.
The news that Wonga has sent 45,000 debt recovery letters from non-existent law firms is just the latest scandal in a long line of disastrous publicity for the payday loans industry. And it could sound the death knell for a company that’s taken great pains to cultivate a positive and friendly image through its ubiquitous advertising campaigns featuring elderly puppet characters.
Further to an investigation by the Financial Conduct Authority (FCA), Wonga has been found guilty of ‘unfair and misleading debt collection practices’ after its practice of sending fake letters was discovered in 2011. The letters, which threatened consumers with legal action if they didn’t repay their loans, were sent from fictional law firms, leading people to believe that their debts had been passed on to a third party for collection. Wonga also added fees to some consumers’ accounts, supposedly to cover the costs of sending the letters.
Due to the changeover in regulation from the Office of Fair Trading (OFT) to the FCA in April 2014, Wonga has managed to escape a fine on this occasion as the letters were sent out when the OFT was still in charge. However, as well as making a compensation order, the FCA has now passed details of the case to the police, who may launch a criminal investigation against the firm.
Wonga is also subject to a second compensation order after a ‘systems error’ led to more than 200,000 people overpaying their loans when their balances were calculated incorrectly. Whilst most of the amounts involved totalled less than £5, Wonga is still required to compensate thousands of current and former customers for the mistake.
These compensation orders may make it look like Wonga is getting its comeuppance, but a closer look at the figures tells a different story. Wonga must pay £50 to each person who received a fake letter and refund any additional fees that were charged for a consumer’s account being ‘referred’ to the non-existent law firms. And for the people whose balances were miscalculated, the lender must pay interest on the overpaid sums at a rate of 8%.
That might sound fair on the surface – but not when you consider that the standard APR charged on a Wonga payday loan is more than 5,800%, according to their website!
Which brings us back to the CMA’s call for an impartial comparison service for payday loan providers, as Wonga certainly aren’t alone in their marketplace when it comes to charging eye-watering interest rates. Overcharging is also rife. In 2012, a CMA investigation into 15 million payday loans found that consumers are overpaying to the tune of £45 million a year, an issue the CMA believes is caused by a lack of competition amongst lenders.
The situation has certainly improved since the FCA took over the regulation of the payday loans industry in April 2014, with almost 50% of providers being forced to close their doors. But these loans are still big business, with total revenues of around £1.1 billion. Wonga alone approved around four million loans to over one million consumers in 2012. Whilst indicating the scale of the market, these figures also highlight the fact that many payday loan borrowers are becoming trapped in a vicious circle of repeat lending.
Having problems with payday loans?
With today’s rising living costs, it’s all too easy to get sucked into the payday loans cycle, with interest and charges piling on at an alarming rate. But help is at hand from Bankruptcy Clinic and our partner firm MoneySolve Ltd. Even if you feel your debts are overwhelming, our experienced debt advisors will help you find the right debt solution and move on with your life.
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