UK's Wonga writes off debt for 330 000 customers

2014-10-02 21:25
Wonga has launched a mobile site for microloans. (Duncan Alfreds, News24)

Wonga has launched a mobile site for microloans. (Duncan Alfreds, News24)

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London - UK short-term lender Wonga is writing off the debt of around 330 000 customers worth about £220m, after being forced to overhaul its lending practices by Britain's financial regulator.

The Financial Conduct Authority (FCA) said on Thursday Wonga had entered into a so-called voluntary requirement agreement to make the changes, which ensures immediate redress for consumers while allowing the regulator to continue investigations and possible enforcement action.

It is the starkest intervention to date by the regulator as it clamps down on practices by companies who charge high interest rates for short periods, dubbed "payday" lenders. Privately owned Wonga is the biggest such lender in Britain.

John Mann, a lawmaker from the opposition Labour Party who sits on Britain's parliamentary Treasury Select Committee, said it was "morally right" Wonga had written off the loans and that Britain should consider more legislation to regulate the industry. He expected Wonga's past and present bosses to be hauled before the Treasury Committee this month.

"This is a form of hoodwinking people and therefore there's an issue of whether it's fraudulent," he told Reuters. "If necessary we need legislation, and we also need to see this company held to account publicly, and that would be the role of the Treasury Committee.

Wonga had no immediate comment on Mann's remarks.

The company will write off all the debt of the 330 000 customers who are in arrears for 30 days or more. A further 45 000 customers who are in arrears of up to 29 days will not be charged interest and be given longer to pay back their debt.

The bill for compensating customers will come to about £220m, people familiar with the matter said. That works out at an average of £666 for affected customers.

The company has already taken significant provisions for those loans not being repaid, and so will take a hit of about £35m in its 2014 results as a result of the write-off, one of the sources said.

The latest in a series of blows to the company will raise questions about its prospects, however.

Its profits more than halved last year to £39.7m after it had to set aside £18.8m to cover legal fees and fines from regulators arising from a scandal in which it sent fake legal letters to customers.

Hardship

Wonga launched in 2007 and grew rapidly, saying it filled a gap left by traditional lenders by providing flexible financing for thousands of people. It has 1 million customers in Britain, and another 3 million in eight other countries, including South Africa, Canada and Spain.

It is backed by technology investors including Accel Partners, Balderton Capital and Greylock Partners. Other investors include Dawn Capital, Meritech Capital and Oak Investment Partners. The investors either declined to comment, did not respond to requests or could not be reached.

Wonga has raised $145 million in three equity fundraisings since 2007, mostly in 2011, to help it grow.

It and other short-term lenders have been lambasted by politicians as well as the Church of England for charging high interest rates - which at Wonga can equate to 5 853% a year - that cause hardship for many of its customers.

Regulators have started to take action to better protect the estimated 1.6 million customers who take out 10 million payday loans a year, worth £2.5bn. The average loan is £260 and an increasing number of people are taking loans from multiple firms, according to an FCA industry survey.

The FCA, which took responsibility for short-term lenders six months ago, said in July it would cap fees on new payday loans from next year.

Mann said that did not go far enough, and regulators should introduce a more robust system for firms to assess if borrowers can afford to pay back loans.

"The announcement today... is a clear sign to the consumer credit industry that it must be prepared for a more interventionist and active regulator," said Michael Ruck, a lawyer at Pinsent Masons and formerly at the FCA.

Wonga said it was making significant changes to its lending criteria that would mean it accepts "significantly fewer" loan applications and would mean some existing customers would no longer be able to borrow from it.

Wonga's Chair Andy Haste, who joined in July, vowed to reform strategy. "It's clear to me that the need for change at Wonga is real and urgent," he said on Thursday.

"We want to ensure we only lend to those who can reasonably afford the loan in question, and during my review it became clear to me that this has unfortunately not always been the case," he said.


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