The Wonga Administrators sent a letter in late October to some of Wonga’s creditors with their proposals to handle the administration. These include:
- background on the events before administration;
- how to decide the payday loan affordability complaints that have already been sent to Wonga; and
- how to encourage other customers to submit a complaint.
These Proposals were agreed by a vote of creditors.
This article has extracts from the proposals. You can see the full version at Companies House. The bits in italics here are quotes from the proposals; the bits not in italics (including the headings) are my comments.
Let’s start with a very simplistic look at what administration does.
Administration is like dividing up a pie…
The Administrators have to divide the available money between the creditors. Some creditors take priority, this includes secured creditors and employees who are owed wages. They get the full amount they are owed and are paid first.
The rest of the money is then left for the other creditors – think of this as being a pie. The Administrators job is to :
- make the pie as big as possible, by selling assets for as much as they can; and
- divide the pie fairly between the unsecured creditors.
As you should have got a refund from Wonga, you are now an unsecured creditor. The amount of money you will get depends on:
- how big the pie is;
- the size of the refund you should have got from Wonga;
- how much the other creditors are owed – for Wonga this mean how many other people are getting refunds and how large their refunds are, as well as how much is owed to Wonga’s business creditors.
The Administrators have said from the beginning that there won’t be enough money to pay everyone in full. But they won’t know how large the pie is for a long while, as Wonga’s foreign assets are being sold and money is being collected from outstanding loans.
The costs of administration will reduce the money available, so it’s important that these are minimised.
The Administrators won’t know how many unsecured creditors there are and how much they are owed until each complaint has been decided. And they also need to encourage people who may have a good complaint to come forward.
The Administrators don’t actually care how large the refunds determined are, or how many customers get them, they just want a fair process. So there is no reason for the Administrators to try to make the refund decisions as low as possible.
I hope that is a helpful background to the Administrators’ proposals.
What happened before Wonga’s administration
In early 2018, WGL commenced a process to secure debt funding to support a 5-year growth plan both for Wonga UK and the overseas subsidiaries. By March 2018 the Group had identified 3 potential funding partners and at that stage there was a clear expectation that the funding could be secured, subject to appropriate due diligence and negotiations.
During 2018 two factors changed the outlook for both the UK business and the wider Group:
• An interim determination from FOS
• An increase in the level of complaints.
Over 6 year complaints
Wonga UK’s assessment of its potential redress liability in relation to borrower complaints and subsequent
cash outflow was based on a time limit of 6 years.
In late March 2018, Wonga UK received an update on the likely outcome of an interim determination by FOS that a borrower complaint that was older than 6 years may be considered within the time limits for a valid complaint…
If the interim determination was upheld, it would result in a significantly higher level of potential redress liability than was originally forecast. This would have a negative unquantified impact on redress provisioning…
… on 17 July 2018 the Group raised c.£11 million from an equity placement with certain existing shareholders. In advance of the equity investment, the Group had engaged corporate finance advisors to commence and manage the sale of Wonga Poland on behalf of WWL.
On 28 August 2018, FOS confirmed its final decision on the borrower complaint on the same terms as the interim determination.
FOS has now published two decisions on as general guidance, see Ombudsman decision on payday loans over 6 years. Both of these show that FOS thinks it has the jurisdiction to consider older loans.
Increased numbers of complaints in July and August
… it was found that the July 2018 complaints level had increased to around double the historic run-rate. This increase arose primarily from submissions from Claims Management Companies (CMCs) in late July however there was also a significant increase in direct complaints from borrowers.
In August 2018 complaints continued to increase and had risen three times higher than the level received earlier in 2018. The Group assessed that the cashflow impact of this level of increased claims would be beyond the resources of the Group, even with the sale of Wonga Poland.
Loans which haven’t yet been repaid
Some statistics on the loan book included in the Proposals:
- 206,000 borrowers at the start of administration. The value of current balances (that is those not in arrears) was c £21m and in arrears was c £56m.
- at 12 October c £9m had been collected.
- most of the arrears at 12 October are for one-month loans, where the outstanding balance is c £35 million and c £30m of that is over 6 months old.
Given the short-term nature of the loan book, the initial strategy is to collect loans as normal whilst the Administrators investigate the opportunity for a sale of the residual loan book, and any other assets of the UK trading business.
From comments on the Wonga refunds – the latest news page, people who have complained and who currently owe a balance are being asked to repay it. That seems to me to be an unfair way to treat a group of potential creditors as anyone with a successful complaint would have the right to set off the refund against the balance.
The sale of the residual loan book may be complicated as a significant number of those customers may potentially have good affordability complaints.
For clarification, if there is a debt sale of the outstanding loan book, it is not envisaged that any purchaser will assume any of the existing liabilities (including redress claims) of Wonga UK except to the extent that by law they are compelled to do so.
I am not a lawyer and I can’t comment on whether what would happen to the right of set-off if a loan is sold. There would seem to be three possible cases: customers who had already made a complaint before the loan was sold; those who complained after the loan was sold but before the company is wound up; and those that complain afterwards.
How current complaints will be decided
Outstanding complaint numbers:
- at the start of administration there were 24,000 claims awaiting a decision by Wonga and 9,500 claims with the Finacial Ombudsman (FOS);
- since then between 200 and 500 claims a day have been received.
The Administrators are unable at this time to forecast the likely volume of redress creditors [those are the people who should get refunds for unaffordable lending] and the total estimated value of these claims, albeit we expect that redress creditors will be the majority unsecured creditors in the Company.
The Administrators are in the process of defining and building an adjudication tool based entirely on data points within the Company’s possession. The FCA and the FOS have been consulted during the development of this tool to ensure that they are aware of the Administrators’ intended process. The Administrators’ intention is for the adjudication tool to automatically adjudicate claims, aligned as closely as possible to the current FOS methodology. The costs of the Administrators undertaking a wholly manual review of each claim would likely result in little to no funds being available for distribution to any unsecured creditors of the administration.
“Current FOS methodology” involves looking at bank statements and credit reports as well as the Wonga loan history. Any automated tool is going to be a very rough approximation.
How fair the process is will depend on the details of the decision making in the automated tool. I hope these will be published. I expect that it will be based around a definition of where a chain of loans – loans with only small gaps between them – is likely to form irresponsible borrowing. And that loans over 6 years old will be included.
FOS said last week that it will not be working on the current Wonga complaints, which will be returned to the Administrators.
For those claimants who were given final response letters by the Company prior to the administration, the Administrators will adjudicate these claims as being accepted and as unsecured creditors.
I am not clear about this. If it is just saying that anyone who has already been made an offer by Wonga is going to be an unsecured creditor that is fine.
But if it is saying that the refund award for claims that were sent to FOS will be set at what Wonga has already offered, I think that would be putting this group of creditors at a disadvantage.
I suggest that:
- any FOS complaints where there has been an adjudicator decision should have that decision accepted;
- FOS complaints which have not reached an adjudicator decision should go through the new automated tool.
UPDATE – this has now been clarified. The Wonga website says: Any claims with a final response letter from Wonga will be agreed based on the value of the Wonga decision, or if higher, at the Joint Administrators’ adjudication value.
Encouraging more complaints
The intention is for claimants to submit claims easily via the administration portal and notify the Administrators of the borrower account details if the borrower believes they have a claim.
This refers to customers who have not yet made complaints.
We will be communicating with potential redress claimants in the coming months to explain how they are able to submit claims and will be regularly updating the Company’s website (www.wonga.com/help) with further information. The Administrators will also undertake a national advertising campaign to alert all possible redress creditors who may have changed contact details since they last engaged with the Company.
So the Administrators will be writing or emailing Wonga customers who have not yet submitted a complaint. It’s not clear if they will try to contact every previous customer or just those where the automated tool shows that they would get a refund.
Possible sale of borrower details
To date there have been c.60 expressions of interest … across the Group’s assets including the loan book, IT platform, brand name and borrower database.
Perhaps GDPR would prevent sale of the borrower database – but that is probably wishful thinking on my part.
How long will all this take?
due to the complexity and volume of claims we expect to adjudicate, the administration is likely to take more than 12 months.
Normally administrations take less than a year. As this will take longer, the Administrators will have to go to court and get permission.
Our next report to creditors will be a progress report for the period 31 August 2018 to 28 February 2019, to be delivered within one month of the end of the period.
So that will be in March 2019. I hope we hear some more about the way the automated affordability assessment tool will work before then.
This is broadly what I expected.
Some people may feel upset that the automated tool for assessing complaints means their case won’t be “properly looked at” and that the Financial Ombudsman won’t be there as an appeal mechanism. But I think this is inevitable – there is no point in a complex process that will cost so much that there is no money left to pay any refunds.
I do have concerns about customers with current loans who are being asked to repay these despite having made a complaint about irresponsible lending. And I think any sales of the loan book should be postponed until after the campaign to encourage customers to complain has finished and all complaints have been determined.