UPDATE On September 13 ICL put an update on its website to say:
Over the previous weeks, we have been refining how we will assess complaints made to us in the Scheme, and there have been some important developments, which might affect how much consumers might get in the Scheme.
It has clarified how it will assess claims for refunds, accepting all loans over 6 years and more claims in general. And it now thinks that more people may apply for a refund than it had factored in. So the 80p in the £ refund may turn out to be 14p in the £
See Money Shop, Payday UK & Payday Express LATEST NEWS for details.
On August 14, people who had borrowed from the Money Shop, Payday UK or Payday Express started to receive emails from Instant Cash Loans (ICL), the company that owns these payday lender brands. The email asks customers to vote to approve a Scheme of Arrangement.
The Scheme limits the money ICL will pay to customers who have an affordability complaint – they were given loans they could not repay without hardship or borrowing more money.
Here I am looking at one aspect – the amount customers may get back.
ICL says: We think that: former customers with complaints about loans will receive about 80% of what we owe them (although this amount may be lower)
My first thought was:
That 80% figure looks astonishingly high based on Financial Ombudsman (FOS) decisions I have seen and what we know is happening in the Wonga and Wageday Advance administrations.
It seems to me that the figure can only be accurate if one or more of the following applies:
- ICL rejects a large number of complaints that the FOS would be likely to award compensation for;
- where ICL does approve a claim, it will often be for fewer loans than FOS would say to refund;
- ICL is assuming that a low number of claims will be made.
People are being asked to approve a Scheme where they may reasonably assume their claim will be assessed in a way that is broadly comparable to what FOS does.
I think ICL needs to say more about how it is planning to assess complaints and what further evidence people may be required to produce to have a claim accepted.
Without this detail, I think the statement that people may get 80% “of what we owe them” may be misleading.
Assessing refunds for WageDay Advance and Wonga customers
As background, let’s look at how two sets of Insolvency Practitioners have decided how to assess claims against major payday lenders that have gone bust.
Both Administrators have developed a Claims Calculator, pointing out that an automated process was essential as a manual one would cost so much there would be no money left to pay refunds.
The Calculators follow the FOS approach as far as is possible, considering the size of loans, the customer’s declared income, any previous payment problems, the number of loans and whether there were large gaps between loans or there were long chains of borrowing. Loans over 6 years old are treated in the same way for a refund as more recent loans.
Previous settlements are also being reviewed by the Calculators. Some customers who were made a low offer either didn’t understand how poor it was or were in such financial difficulty they had to accept it. They are being informed they are entitled to additional compensation.
In both cases, the Administrators have started informing customers whether they have a valid claim and how much it has been calculated at, so people have seen actual numbers.
With any automated process, some people will feel that they would have got a better result from going to FOS – that is inevitable. But so far the comments I have seen from people are broadly happy. Some people will just have been surprised and have no idea what the number should be, but others have had settlements from other lenders or via FOS so they have a reasonable feel for what they should get back.
To me it feels as though both sets of Administrators are doing a good job of assessing the Claims in a neutral way.
Comparing numbers – The Money Shop with Wageday Advance
Total number of customers:
- WDA 800,000
- ICL 2.6 million.
Estimate of number of customers entitled to redress:
- WDA 330,000
- ICL – not given.
Estimate of total redress:
- WDA £223m
- ICL £17.1m (page 20 of the Explanatory Statement).
From what I have seen of complaints against the Money Shop, Payday UK and Payday Express I would say those lenders had been just as “bad” as Wageday Advance in irresponsible lending.
If ICL’s redress total was 3.25 times as large as WDA’s estimate, to reflect the larger number of customers, it would be c £725m.
That is why I find the £17.1m estimate of the value of ICL redress claims very unlikely. It must be based on a completely different sort of calculation to the ones the Wonga and Wageday Advance Administrators are doing.
80% – really?
Wageday Advance approached the FCA to approve a proposed Scheme of Arrangement at the start of 2019, proposing to cap their liability to pay refunds at c £18m. The Administrators later said that:
redress creditors would … have faced a very significant shortfall against the value of their claims in the Scheme.
It is very hard to see how this can be squared with ICL’s assertion that its customers may get 80% of their redress paid when it has so many more customers and is only putting in c £20m.
Above I estimated ICL’s total redress bill at £725m. using that, the payout would be about 2%, not 80%.
But a large number of customers with small claims may not bother to apply, so the bill could well be halved, resulting in an average payout of about 4%.
It is possible that people whose claims are accepted would get close to 80% of the interest on the loans to be refunded, but the number of loans being refunded will turn out to be surprisingly low and many people will have their claims rejected entirely. But that is not what people would expect to happen having read the Explanatory Statement.
What does the FCA think of this?
I wonder what the FCA thinks of ICL’s proposed Scheme?
Although the FCA didn’t say No, to Wageday Advance’s Scheme, it just kept asking for more information until the company concluded the Scheme would not be approved.
So now the FCA has an authorised firm, ICL, with three times as many customers as Wageday Advance, proposing to put in about the same amount of money that the FCA did not seem to think was satisfactory for Wageday Advance.
More clarity is needed before people vote
If the Scheme is turned down, the company will go into administration. So perhaps customers should vote for the Scheme because they would get less in administration.
But I think it is unreasonable to ask people to vote for something until it has not been clearly explained. Especially where one of the biggest selling points – the possible 80% payout – could well be a lot too high.