LONDON—The image of payday lending got another knock Wednesday as Wonga Group, Britain's biggest payday loan provider, was slapped by the Financial Conduct Authority for sending threatening letters from made-up law firms to late paying customers.
The FCA, which started regulating Wonga and other consumer credit companies in April, said the lender has agreed to pay £2.6 million ($4.4 million) in compensation to 45,000 customers who received letters from fictitious firms "Chainey, D'Amato & Shannon" and "Barker and Lowe Legal Recoveries" between 2008 and 2010. The regulator said the practice, meant to maximize Wonga's collections of delinquent loans, was unacceptable and pressured customers to repay debt that many of them couldn't afford.
But the FCA didn't take any enforcement action such as fining Wonga, since the activities took place before it had powers over Britain's £2 billion payday loan market. The Office of Fair Trading, which started investigating Wonga's debt collection practices in 2011, handed the case to the FCA in April and no longer exists.
"It's a shocking new low for the payday industry that is already dogged by bad practice and Wonga deserves to have the book thrown at it," said Richard Lloyd, executive director at Which?, a consumer protection group.
The FCA started a crackdown on payday lenders when it took over supervision of the industry and is working on a potential cap of the interest lenders can charge. The market more than doubled to £2 billion in 2012 from £900 million in 2008. In the U.S., the Consumer Financial Protection Bureau started supervising payday lenders in 2012. Some U.S. states ban the loans entirely while others have set up databases of customers' loan usage for payday lenders to check before extending new loans.
"Wonga's misconduct was very serious because it had the effect of exacerbating an already difficult situation for customers in arrears. We are pleased that Wonga has been working with us to put matters right for its customers and to ensure that these historical practices are truly a thing of the past," FCA Director of Supervision Clive Adamson said.
Wonga is Britain's biggest payday lender by volume and customer numbers, with around £1.2 billion lent through 4 million loans to 1 million customers in 2012. It boasts on its website that it can send up to £400 within five minutes of a loan being approved, and offers existing customers up to £1,000. Borrowing £400 for 30 days would cost £527.15, according to its online calculator.
Those high interest rates and heavy marketing through television advertising have drawn criticism from politicians and public leaders, including Archbishop of Canterbury Justin Welby, who is setting up a church-backed credit union to provide cheaper small loans. Wonga says it is a responsible lender providing a simple and transparent alternative to banks.
"This is not the proudest day in Wonga's business. We're a very different business now to the startup we were four or five years ago when this was occurring," Interim Chief Executive Tim Weller said. He apologized to customers and said the people who introduced the fake debt collection letters were no longer with the company. He declined to name any individuals involved.
Privately-held Wonga has undergone a number of management changes in recent months, including the departure of two CEOs since November. Mr. Weller took over from Niall Wass, who resigned in May after a six-month stint. Mr. Wass had replaced Wonga co-founder and former CEO Errol Damelin, who continued to be chairman before resigning from that post earlier this month.
Mr. Damelin and Jonty Hurwitz co-founded Wonga in 2006 with the aim of making short-term lending easier and more profitable by automating credit checks and bringing the process online. Mr. Hurwitz stepped down from the Wonga board in November.
Wonga also said Wednesday that it had discovered separate problems with its systems as it prepared to come under FCA regulation this year. It said it had overcharged around 200,000 customers on their loans and would contact them regarding repayment.
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