Last year, the Financial Conduct Authority (FCA) announced that 99% of the UK’s payday lenders would be forced to shut down following a cap on the cost of credit, which came into effect in January 2015.
This week, Wonga, one of the biggest players in the market, reported a full-year loss of £37.3m – and it has predicted more losses to come. While many believe the lender earned its comeuppance – Martin Lewis, founder of Moneysavingexpert.com, tweeted: “Wonga announces losses of £37m. So sorry to hear that! Happy to lend you some cash if you need it. Shall we say 5,000%?” – others are considering the possible implications for borrowers and the wider industry.
£37.3m
The full-year loss that Wonga revealed earlier this week
FCA could do more
Carl Packman, Contributing Editor to political blog Left Foot Forward and author of Loansharks: the Rise and Rise of Payday Lending, has little sympathy for Wonga.
“The company used to say that it picked up a disproportionate amount of the slack for the entire payday loans sector, but don’t be fooled: for what has been reported today Wonga is entirely to blame,” he writes.
But while the regulatory regime may have brought Wonga to justice, it is not living up to expectations, Packman argues.
“The FCA started to regulate the payday loans sector in 2014, promising to ‘add teeth’ to a once sloppily enforced set of rules for consumer credit firms,” he notes. “However as far as rules are concerned, all they are doing is enforcing the existing ones.”
Left Foot Forward opinion
End of the road?
Adam Gale of Management Today has more faith in the FCA’s regulations, but believes Wonga could still bounce back.
The days of “cute puppets and runaway profits” at Wonga appear to be over, as the company finds itself caught in the FCA’s snare, writes Gale. “The stringent new regulations are widely expected to decimate the industry, with many lenders not even bothering to apply to the FCA for a continued licence to trade,” he adds. “There simply won’t be as much business going round, and the margins won’t be as good.”
But this doesn’t necessarily spell the end for Wonga, Gale notes. “This isn’t to say Wonga will disappear altogether, presuming the FCA accepts its measures as being sufficiently far-reaching,” he writes. “But it does mean it’s likely to be smaller.”
Management Today piece
Filling the gap
Meanwhile, the Daily Mail’s Alex Brummer considers what tighter regulation might mean for borrowers.
Like Packman, Brummer believes “few tears will be shed” for Wonga’s losses, but he also emphasises that the need for emergency loans will not disappear along with the penalised lenders. “As nice as it would be if there was no need in the market for payday or doorstep lending, it still fills a gap,” he argues.
“There will be those who will argue that they want no truck with payday lenders, and it would be better if Wonga et al were quietly buried,” Brummer writes. “It is worth remembering, however, that unauthorised overdrafts at high street banks can, on occasions, be equally as usurious as payday lenders. And the alternative of driving the industry back underground, leaving it in the hands of baseball bat-wielding thugs, is no answer.”
This is Money comment
Seen a blog, news story or discussion online that you think might interest CISI members? Email joanna.lewin@wardour.co.uk