January 2019 – Wageday Advance proposes cutting the refunds it pays

Wageday Advance asks the FCA for a Scheme of Arrangement

On 31 January 2019, Curo, the American parent of payday lender Wageday Advance (WDA) announced it is in talks with the FCA about a Scheme of Arrangement (SOA) for its redress liabilities in the UK.

See Curo’s statement in its end-of-year results.

These liabilities are the payday loan refunds that WDA is having to pay to current and previous customers who were given unaffordable loans.

Curo has proposed to the FCA that in the scheme:

• there will be a cap of $22.8m (£17.9m) on the total compensation paid to WDA customers;
• WDA will determine which customers have a valid claim and how much to pay them; and
• customers can’t go to the Ombudsman.

It expects to get a decision from the FCA before the end of February and has said that if the scheme is not approved it may consider a sale of the business or insolvency proceedings.

This article looks at why Wageday Advance is receiving so many complaints, its financial problems and the discussions it is having with FCA.

WDA’s financial problems from complaints

Wageday Advance started in 2004, one of the earliest payday lenders in Britain. In 2013 it was bought by  Curo, an American company that specialises in sub-prime lending.

Curo announced in its 3rd quarter results in October 2018 that WDA had paid c $4million in claims costs in the previous quarter, up from $1.4m in the 2nd quarter.

It said:

After careful consideration, we do not believe that, given the scale of our U.K. operations, we can sustain claims at this level and may not be able to continue viable U.K. business operations without action by the U.K. business to reduce the risk of claims relating to historic lending. We have been in ongoing discussions with relevant regulators, including the Financial Conduct Authority (“FCA”) and the Financial Ombudsman Service with regard to our alternatives. 

… We are evaluating, and are discussing with the FCA, several potential courses of action including potential solutions to allow the firm to finally resolve liabilities associated with historic lending. The potential alternatives under consideration may require approval of the FCA, consent under certain of our debt facilities and court approval in the U.K.

The claims referred to here are payday loan affordability complaints, where the borrower is saying WDA did not make proper checks that they could afford to repay the loan without having to borrow again. The typical compensation for this is a refund of the interest paid, removing all the lender’s profit on the loans.

WDA had 749 cases sent to the Financial Ombudsman in the first six months of 2018. During this time the ombudsman agreed with the customer in 56% of WDA cases.

Lenders are supposed to apply the same approach to determining a customer complaint that FOS does. The average uphold rate at FOS across all products is only 30%. WDA’s very high uphold rate suggests they are not correctly assessing customer complaints.

Irresponsible lending by WDA

“We accept 85% of all applications” – and no credit checks!

Those statements were on WDA’s website in January 2012. The following pictures all come from that date.

It doesn’t sound as though they were very careful about checking if people could afford their loans. Wageday Advance saw no credit checks as being a selling point for their customers:

Although WDA didn’t do credit checks, they did sometimes ask customers to provide a bank statement. But they don’t seem to have looked at them carefully. In Mrs K’s case, where she had 2 loans and the second one was rolled three times, the Ombudsman comments:

it’s not enough to simply gather information. A lender needs to look at what it has and react to what it sees.

Frequent loan extensions

Before 2015, Wageday Advance also encouraged customers to apply for more loans or to extend a loan. Extending a loan is sometimes called rolling or deferring it – it involves just paying the interest one month then next month paying another lot of interest and repaying the amount borrowed. For some customers, this led to long periods of continuous borrowing from WDA. Mrs M had 24 loans and 18 deferrals from 2010 to 2014.

Multi Pay (MPay) – extremely high rates for 18 month loans

I don’t know when this product was introduced by WDA. It was discontinued after the FCA introduced the payday loan cap, even though technically it would not be caught by the cap as the loan was for more than 12 months.

Mr J’s borrowed £350 and he had to pay back £1,800 at a rate of £100 a month for 18 months, an APR of over 2,400%. Normally you can’t win a payday loan complaint by saying the interest rate was too high, you have to show the repayments were not affordable, but in this sort of loan WDA was charging the sky-high interest rates used for very short term loans for a prolonged period. The ombudsman looking at this complaint decided:

this MPay loan had an interest rate so egregious that I think a court may well have found it grossly exorbitant and that the agreement required payments which grossly contravene ordinary principles of fair dealing.

Post 2015 – better lending?

Like all UK payday lenders, WDA was forced to reduce its interest rates, restrict roll-overs and make improvements to its affordability checking after the FCA introduced the payday loan price cap in 2015.

But FOS decisions show that WDA continued to make some poor lending decisions. Here are a couple of examples picked at random, they are not isolated cases:

• Miss W borrowed eight times from WDA between 2016 and 62017. The Ombudsman decided WDA must refund the interest on the last six loans.
• Miss T had 14 loans from November 2015 to December 2016. By the 5th loan, WDA should have considered that Miss T may have been dependent on the loans and performed a full financial check which would have found a significant amount of gambling.

WDA’s current lending

One way to make sure more lending is affordable is to move away from the classic borrow one month, repay it all the next, payday loan to longer terms where the monthly payments are lower. In 2016, two-thirds of its turnover came from simple one payment payday loans and one third from instalment loans. In 2017 that reversed, so two-thirds of its business was from longer-term loans.

But for its two- and three-month loans, WDA currently has a “balloon payment” structure, where the first months are cheap and the last one is more than three times as much.

This has the advantage for WDA that it maximises the interest they can charge on the loan. And it may look more attractive to a borrower who only looks at the size of the first repayment.  But the large final payments means these balloon payment loans do not help with affordability issues.

Is 23 million dollars a reasonable offer?

That seems very unlikely.

Curo’s results showed its complaints costs were $4m in Q3 and $4.6m in Q4 last year. But the Q4 figures must have been lower than they would otherwise have been because WDA seems to have been telling most people complaining that it needed more time to reach a decision, resulting in a large backlog of unresolved complaints.

Also for a long period WDA was telling customers who complained about loans that were over six years old that they could not be considered because the loans were “statute barred”. In September FOS issued guidance decisions saying that it could look at loans that were more than six years old.

Someone asked me last week how much I thought would be acceptable. I guessed that $100m might cover the refunds for previous lending but at $50m I thought there would have to be a very careful examination of the number of cases currently at FOS, the number of cases in the internal WDA complaints, and the number of customers with potential complaints.

WDA must have told the FCA these numbers and how it has estimated the liabilities. At the moment it isn’t known if WDA is proposing to pay customers with complaints 20%, 50% or how much of the value of a refund they might expect at the moment.

Should the FCA agree to this proposed Scheme?

Curo’s end year results show that WDA’s underlying business in the UK has been growing well:

• gross revenue up from c £14m in Q4 2017 to c£20m a year later.
• active customers in good standing have increased from c 42,000 to c 50,000 over the same year.

Curo says:

The proposed SOA caps the amount of cash required for the Redress Claims for the SOA Creditors and, if implemented, the Company believes would firmly establish CTL as a leading market participant in the United Kingdom. Additionally, upon completion of the SOA, CTL will be positioned to capitalize on a large and attractive addressable market that has been experiencing major competitive disruptions, recently because of the Redress Claims affecting other high-cost short-term credit providers.

I think this amounts to saying that a lot of other UK payday lenders are having big problems with paying refunds. reducing and capping what we pay will make WDA safe so we can then take advantage of this and grab more of a very profitable market…

I don’t see how the FCA could think this is acceptable. It sets a very bad precedent for any authorised business that wants to walk away from major problems in its past and carry on trading.

UPDATE 19 February Website down, blaming “technical problems”

The UK payday lender Wageday Advance (WDA) is currently not lending. Its website has been down for at least three days as of 22/02/19. It is blaming technical problems:

We’re experiencing some technical issues with our site which means we aren’t able to process loan applications for new or returning customers at the moment. Please bear with us while we get up and running again.

UPDATE 26 February Wageday Advance goes into administration

On 26 February the FCA announced that Wageday Advance has gone into administration. See Wageday Advance (WDA) goes under for details.

UPDATE What the Administrators said about the Scheme

The Administrators in their Proposals looked at the background to the administration.  They said:

Following feedback from the FCA on 18 January 2019 in relation to the Company’s original proposal in respect of the Scheme, the Company put forward to the FCA a final revised proposal for the Scheme on 24 January 2019, with a materially increased level of funding from the Group (despite this increase, redress creditors would still have faced a very significant shortfall against the value of their claims in the Scheme).

The FCA then came back and asked for further information. The Directors concluded the FCA was not likely to agree the Scheme going forward and decided to go into administration.

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