In 2018, when Wonga went into administration, people started asking isn’t there some kind of guarantee system that would step in if Wonga fails? Won’t the FSCS help?
This has become more important every year since then, with most of the major payday lenders failing, including the Money Shop, QuickQuid, Sunny and Myjar.
From 2020, other sorts of high cost lenders have also being failing, either going into administration (BrightHouse, Buddy Loans, Loans At Home) or into a Scheme (Provident and Amigo).
In the UK, the Financial Services Compensation Scheme (FSCS) provides a safety net for many customers:
- if your bank fails the money you have in a current or savings account is protected up to £85,000;
- if you were claiming a PPI refund and the company went under, the FSCS paid your refund in full. This happened with Welcome Financial Services.
The FCA rulebook says:
By making rules that allow the FSCS to provide compensation at a level appropriate for the protection of retail consumers and small businesses, the FCA enables consumers to participate in the financial markets with the confidence that they will be protected, at least in part, should the relevant person with whom they are dealing, or a successor, be unable to satisfy claims against it.
Is Wonga, or another payday lender, covered by the FSCS?
The FSCS website says
- We can pay compensation only when an authorised firm is in default. We will carry out an investigation to establish whether or not this is the case.
- We can pay compensation only for financial loss and there are limits to the amounts of compensation we can pay.
That may sound promising, because Wonga is authorised by the FCA.
But the FCA register for Wonga said in 2018:
It cannot be determined if FSCS cover would apply to this firm. Please contact the firm directly to understand whether their products/services would be covered by FSCS.
Not all business done by FCA authorised firms is covered by the FSCS. A claim has to be about one of the following types of business:
- some investments (see COMP 5.5); or
- some mortgage advice (see COMP 5.6); or
- some insurance contracts, which includes PPI (see COMP 5.7); or
- loss of client money by a debt management firm (see COMP 5.8).
In addition, deposit protection – your savings at a bank – are covered by the PRA rulebook.
That list doesn’t include giving loans, so claims against Wonga and other lenders are not covered by the FSCS.
The FCA decided not to extend the FSCS to cover lending
In 2014 when the FCA took over regulating the consumer credit market, including payday lenders, it said:
The Financial Services Compensation Scheme (FSCS) can pay compensation where a firm is unable to. Consumer credit will not be covered by the FSCS straight away. We will review this when all firms are authorised by us.
But in 2016, the FCA decided:
Having now considered the issue in more detail, we still believe that most consumer credit activities should remain outside FSCS protection because our other regulatory requirements are sufficient.
At that point, it only made the minor extension to FSCS coverage to include debt management, not to include lenders such as Wonga.
How did the FCA justify this?
In 2019, the Treasury Select Committee asked the FCA why high cost short term lending (ie payday loans) hadn’t been included in the FSCS, whether the FCA now intended to consult about this and if not, how they would ensure that customers were not disadvantaged when a payday lender goes into administration.
The FCA response said its actions such as the price cap had reduced the likely losses to consures. The letter said:
“it is our view that consumer credit activities… are unlikely to give rise to financial losses for consumers either (i) often or (ii) of significant amounts.”
But by the end of 2021, it has become clear that millions of customers have lost out as a result of high cost lenders failing.