Do a million need payday loan compensation?

On 2nd October 2014 the Financial Conduct Authority (FCA) announced that Wonga had agreed to compensate an estimated 375,000 customers where Wonga’s “affordability” checks are likely to have been inadequate.

The common reactions were first that Wonga was being made an example of to warn other payday lenders and second that this was a huge number of refunds…

But should many more people get compensation? Both Wonga customers and those who have borrowed from other payday lenders?

Other payday lenders are as bad

I haven’t seen any suggestion that Wonga’s lending practices were worse in general than its competitors.

As part of its investigation into the payday loans market, the Competition and Markets Authority (CMA) Summary of Provisional Findings Report says:

“Customers often take out multiple loans over time and many use more than one lender – we estimate that an average payday lending customer [in 2012] takes out around six loans in a 12-month period“.

For a customer to require six payday loans in a year would seem to be an obvious flag that the original loan – and all the subsequent ones – wasn’t affordable.

It seems likely therefore that most lenders were, like Wonga, applying inadequate affordability assessments for a significant number of their customers. So how many customers could be affected across all firms?

It is widely quoted that Wonga has had a 30-40% share of the payday loan market. Simplistically we could take the 375,000 customers Wonga is compensating and gross that up to between 950,000-1,100,000 customers of all payday lenders.

But the CMA’s report also says “approximately four in ten payday lending customers used more than one lender in 2012“, so this would be an overestimate as it would be double counting the customers using more than one firm and 700-800,000 might be more realistic number of people with payday loans at the moment.

But Wonga estimates are too low

Wonga has agreed to compensate two groups of people. Those who are in arrears by more than a month are having the whole loan written off. Those that have smaller arrears will only have to repay what they borrowed, not interest and charges.

However large numbers of Wonga’s other customers were in an equally difficult position because of Wonga’s lack of affordability checks, but chose a different route out such as:

• borrowing from friends or family;
• borrowing from another payday lender to repay Wonga;
• taking other “bad credit” loans such as logbook loans or guarantor loans;
• prioritising payday loan repayments to try to escape the high-interest trap, but at a cost of accumulating arrears on priority debts such as rent, council tax and utilities.

These customers are victims of Wonga’s irresponsible lending just as much as the ones with arrears that will be receiving redress.

If they are included in the numbers, it seems likely that well over a million people in Britain should be getting some payday loan compensation.

Update: as an example of how a write off could be much lower than the amount of unaffordable lending a customer had had, see this example from a reader – write off £112, interest paid on loans determined by the Administrators to be unaffordable £5,202.35.

“To encourage the others”

At first sight, the FCA’s dealings with Wonga look a lot like the approach Voltaire satirised by saying

In this country [Britain], it is good to kill an admiral from time to time to encourage the others.

Wonga has presumably been picked on because of its large market share and high profile. The FCA appears to be hoping that its example will force other payday lenders to improve or exit the market, which is already due to become less profitable when the FCA’s proposed lending caps are imposed in 2015.

It is not clear if the FCA will be expecting other lenders who wish to remain in the business to follow Wonga’s example and “volunteer” to compensate their customers who are in difficulties. If they do, the total numbers of people getting payday loans written off could rise significantly.

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What happened next:

Update In 2015 people started to make “affordability complaints” to lenders asking for refunds. I kept being asked if I could look at someone’s complaint as they didn’t want to get it wrong – which I couldn’t do as there were way too many! So I added template letters to my How to ask for compensation for mis-sold payday loans. That explains why a loan may have been “unaffordable” even if it was repaid it on time, how to complain and how to take a complaint to the Financial Ombudsman.

Update The Ombudsman said that payday loan complaints tripled in 2016/17. Almost all are affordability complaints using variations of my template letters.

Update The cost of payday loan refunds for unaffordable lending forced Wonga into administration in August 2018. The Ombudsman now expects to get 50,000 payday loan affordability complaints in 2018/19.

Update The Wonga administrators had accepted 390,000 customers valid claims for refunds at the end of August 2019, with a month still to go for claims to be sent in. 

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