By Mark Fairlie.
Recent reports have suggested that Wonga, the payday lender, is on the verge of closure because of the costs invoiced with handling a large increase in compensation claims made against them.
Sky News has reported that Wonga has placed Grant Thornton as an administrator if the firm does become insolvent, suggesting that the company is preparing for the worst. The future of the firm will be decided in just a matter of weeks.
In 2014, the Financial Conduct Authority (FCA) ruled against Wonga, stating that their charges were too high and the business practices were unjust. Consequently, the FCA ordered the payday lender to compensate 45,000 customers with a sum of £2.6m.
After this, all payday lenders had to follow new stricter rules such as the capping of interest charges on loans and the treatment of borrowers who fell behind on repayments. Although Wonga claimed that their business was “transformed” following the new regulations, their profits have been significantly reduced and, in 2016, the firm announced that they had pre-tax losses close to £65m.
Compensation for legacy complaints against the firm
According to its management, Wonga was left with no other option but to seek a bailout from its backers since receiving multiple legacy complaints.
A spokesman from Wonga made this statement:
“Wonga recently raised £10m from existing shareholders to address the significant increase in legacy loan complaints seen across the UK short-term credit industry.
“Since then, the number of complaints related to UK loans taken out before the current management team joined in 2014 has accelerated further, driven by claims management company activity.
“Against this claims backdrop, the Wonga board continues to assess all options regarding the future of the group and all of its entities.”
History of Wonga
Originally founded by Errol Damelin, a South African businessman, Wonga first started offering loans to consumers in October 2006.
Wonga’s debt-collection practices were labelled as “unfair and misleading” by the Office of Fair Trading which launched an investigation into the firm which itself was later completed by the FCA.
Between the period of October 2008 and November 2010, Wonga created additional charges to their customers’ accounts to cover the cost of sending incorrect letters.
At the same time, Wonga and other payday lenders in the industry were accused of encouraging customers to take out loans that they could not afford.
Wonga customers received lawyer letters from ‘Chainey, D’Amato & Shannon’ and ‘Barker and Lowe Legal Recoveries’ when their accounts entered areas. However, no such firms existed and the legal letters were fake.
Future of Wonga
Wonga is now exploring all their options including how feasible a pre-pack administration process would be to save their company. Another option for the payday lender might be to sell their assets to increase cash flow, such as their Polish subsidiary.
According to Sky News, Wonga has undergone long and detailed talks with the FCA to discuss the firm’s future prospects.