The collapse of Wonga: Government must act to secure justice for customers, but there are wider lessons to be learnt - Damon Gibbons - Centre for ...
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The collapse of Wonga: Government must act to secure justice for customers, but there are wider lessons to be learnt Damon Gibbons 4th September 2018
Introduction
The payday lender Wonga has collapsed under the weight of claims for rebates and/or
compensation from its borrowers. These arise from the firm’s failure to ensure that people
could afford to make repayments, without this resulting in hardship, prior to advancing credit.
The failure to conduct adequate affordability checks breached the Office of Fair Trading’s
(‘OFT’) ‘Irresponsible Lending Guidance’ which was put in place in 2010 and the Financial
Conduct Authority’s (‘FCA’) rules and guidance concerning creditworthiness assessments,
which have been in place since it took over responsibility for consumer credit regulation in
April 2014.
As an appendix to this paper sets out, the content of the OFT guidance and the FCA’s
requirements with respect to affordability assessment are substantively the same. However,
the OFT guidance was never enforced, and in April 2014 the FCA uncovered widespread
failings at Wonga. It put in place a ‘redress scheme’ in that month for 45,000 customers who
had been subject to ‘unfair debt collection practices’ and in October 2014 it announced a
further scheme to provide redress for 375,000 customers who had been given loans without
a proper affordability assessment having been conducted. At the same time, the FCA insisted
that Wonga review its lending criteria and tools to assess affordability and oversaw – through
the appointment of one of its own ‘Skilled Persons’ – a new lending platform which was
intended to ensure compliance with the FCA requirements moving forwards.
That then should have been the end of the matter. Customers who had been mistreated
should have been compensated through the redress scheme, and Wonga should have been
compliant with the FCA’s affordability assessment requirements form that point onwards.
But this has clearly not been the case. This paper provides our view of why Wonga failed, and
what must now be done to ensure its customers (both past and present) are treated fairly.
The FCA’s redress scheme of October 2014 was inadequate
On 2nd October 2014, the FCA issued a press release providing details of a settlement reached
with Wonga in respect of its failure to conduct proper assessments of a borrower’s
affordability prior to granting loans. This scheme covered 375,000 people who were current
customers of Wonga at that time, with Wonga agreeing to:
• Write off all outstanding amounts for approximately 330,000 customers who were at
least 30 days in arrears with their loans at the time of the FCA announcement; and
• Write off the interest (but not the original amount borrowed) for a further 45,000
customers who were less than 30 days in arrears with their payments at the time of
the announcement. These customers would also be provided with an extended period
of four months to clear their debts.
The basis of the FCA’s decision to provide different levels of redress to customers based on
their arrears position was unclear, and, critically as it would turn out, the scheme did not
2provide any redress for people who had taken out loans in the past but paid these off and who
were therefore not current customers.
Nevertheless, the FCA’s statement of 2nd October 2014 expressed confidence that this redress
package was sufficient to address past practices and that Wonga would be supervised closely
to ensure that, moving forwards, the FCA’s rules concerning affordability assessments would
be observed:
“We are determined to drive up standards in the consumer credit market
and it is disappointing that some firms still have a way to go to meet our
expectations. This should put the rest of the industry on notice – they need
to lend affordably and responsibly. It is absolutely right that Wonga’s new
management team has acted quickly to put things right for their customers
after these issues were raised by the FCA. Effective today, Wonga has
introduced new interim lending criteria that should improve customer
outcomes. It is also working to put in place a new permanent lending
decision platform as soon as possible. The FCA has also required Wonga to
appoint a Skilled Person to monitor the new lending decision platform to
ensure it has the desired effect; the Skilled Person will report to the FCA and
give an independent view of the firm's activities.”
Unfortunately, this statement has not proved to be true.
Firstly, there were immediate problems with the redress scheme that was put in place, as this
did not provide for a refund of interest and charges for people whose loans were written off.
As a result, Wonga customers started to take their case for cash refunds to the Financial
Ombudsman Service. This received national news attention in December 2014, when the BBC
reported a successful claim for cash refunds for a Wonga customer that had already had their
loan written off through the FCA’s redress scheme1.
In this respect, the FCA’s scheme was inadequate even in respect of those borrowers that it
purported to cover – providing them with less redress than they were entitled to and
requiring them to make individual complaints to the Financial Ombudsman Service.
Secondly, the FCA’s redress scheme did not provide any redress for people who had been
previous customers of Wonga. These were also forced to pursue their claims for
compensation through the Financial Services Ombudsman scheme, which has gone on to
uphold a great many of their claims2. Many of these claims go back to the period from 2010
to 2014 and have been upheld against Wonga for a failure to observe the OFT’s earlier
guidance on irresponsible lending. As the FCA’s redress scheme of October 2014 did not cover
1
See for example the BBC News report of 19th December 2014, ‘Wonga customer wins case over
interest and fees’. https://www.bbc.co.uk/news/business-30538162
2
For example, Ombudsman decision reference DRN7105124 made in August 2016. This concerned
the case of Mr R, who took out 28 loans from Wonga over a three-year period starting in July 2011.
In this case, the Ombudsman ruled that Wonga should pay back all interest and fees on the loans,
plus statutory interest at 8% per year, and make an additional payment of £100 as compensation for
its handling of the case.
3these earlier customers, claims from these have been the main ‘unknown’ liability for Wonga,
and it has not provisioned sufficiently to meet the large number of claims that have now been
made against it.
Questions must now be asked about the decision-making processes of the FCA in October
2014, and why its redress scheme failed to provide comprehensive redress for people who
had been lent to irresponsibly prior to that date.
The FCA’s current rules concerning creditworthiness and affordability
assessments are also inadequate
There is also a need to look at what has happened since the FCA’s intervention with Wonga
in 2014. The new lending platform that Wonga put in place at that time, and which was
supposed to ensure that proper affordability assessments were conducted by Wonga since,
was not as effective as the FCA promised.
In fact, the Financial Services Ombudsman has upheld many complaints in respect of poor
affordability assessments for loans made after 2014. A brief examination of the Financial
Services Ombudsman decisions concerning complaints about Wonga shows that irresponsible
lending has remained an ongoing issue at the company. For example:
• In case reference DRN4736076, the Financial Ombudsman Service ruled that Wonga
should refund interest and charges in respect of loans made in March and September
2015; and
• In case reference DRN8906904 the ombudsman ruled that 10 loans made to one
customer from May 2015 through to March 2017 were done so without adequate
affordability checks having been made.
There are therefore some fundamental questions which need to be asked about the FCA’s
rules and guidance concerning affordability assessments. The FCA has consistently argued
that it does not wish to fetter firm’s ‘discretion’ to decide for themselves what is, and what is
not affordable. However, this reluctance to impose a clear judgment about affordability
means that lenders will always seek to game the requirements – particularly where loans
targeted to lower income households are profitable despite forcing people into hardship.
It is particularly disappointing that the FCA has recently (July 2018) finished a consultation
concerning the adequacy or otherwise of its rules concerning affordability assessments by
concluding that significant lender discretion should remain. Many consumer agencies have
called for much more direct interventions to provide clarity for both lenders and borrowers.
Ultimately, the evidence that the FCA’s approach is not working can be found in surveys of
household indebtedness. For example, the Bank of England’s NMG survey indicates that
lower income households have debt burdens which are both persistent and severe and are
caught in a debt trap (figure 1, below).
4Figure 1: Average Debt Burdens by Income Quartile: analysis of NMG survey 2017, n=22873
30
Severity of Debt (repayments as % of income)
Poorest
25
20
2nd Quartile 3rd Quartile Richest 15
10
5
0
50 40 30 20 10 0
Persistence of Debt (total amount owed as % of income)
As the above figure illustrates, the ratio of total debt to income (‘DTI’) of the poorest quarter
of households is currently just below 50%, and the ratio of their regular repayments to their
creditors relative to income (‘DRI’) ratio a little over 25%. Taken together, these ratios
indicate that, on average, it will take these households two years (0.5/0.25) to clear their
debts at current repayment levels even if all interest on their debts were frozen. Paying out
a quarter of their income for a two-year period is simply not sustainable for these households
– whose pre-tax incomes are less than £20,000 per annum. They are not going to be able to
sustain a reasonable standard of living and will likely need to borrow again at various points
simply to ‘make ends meet’. In other words, lower income households are currently caught
in a ‘debt trap’.
In comparison, the richest households have an average DTI ratio of 13% and a DRI ratio at the
same level. These households would, assuming interest were also frozen, clear their debts
within one year (0.13/0.13) and the severity of debt payments relative to income during that
time would be about half as much as for the poorest.
Of course, interest payments are not in reality frozen and differ for households of different
income levels, with the poorest – for the most part – likely to pay a significantly higher interest
rate on their credit agreements than the richest. The result is a considerable problem of
inequality of debt burdens, which the FCA should commit to playing its part to reduce.
3
This disregards outliers where household income was reported in the survey as being extremely
low, and where the debt ratios were therefore extremely high. In these cases, we took this to mean
that income had either been mis-reported within the survey or that people had recently suffered an
income shock (such as becoming unemployed) and where debt repayments had not yet been
adjusted to account for the recent fall in income.
5Looking at this picture since the FCA took on responsibility for the regulation of consumer
credit in April 2014 (table 1, below), it is disappointing to note that there has been little
change in either the DTI or DRI ratios of the lowest two income quartiles. Indeed, the position
of the poorest quarter of households has slightly worsened during this time.
Table 1: Average DTI and DRI ratios of borrowers, NMG surveys 2014 and 2017
Income 2014 Survey4 2017 Survey
Quartile
Total debt to Repayments to Total debt to Repayments to
income (%) income (%) income (%) income (%)
Poorest 44 23 49 26
Second 26 16 27 14
Third 22 11 20 12
Richest 17 10 13 13
Whilst we recognise that the FCA has no influence over incomes, it should be acting to ensure
that when incomes do not keep pace with inflation, and the financial position of households
deteriorates (as has happened in recent years), that this reality is reflected in the lending
practices of firms. The currently high overall DTI and DRI ratios contained in the NMG survey
indicate that problems of irresponsible lending have not been adequately addressed.
Disappointingly, the FCA continues to reject calls to require firms to use these ratios as
measures of an individual’s debt burden within their affordability assessment. In its recent
policy statement (PS18/19), it argues that doing so could have ‘unintended consequences’
and that they would risk impacting on the ‘cost and availability of credit’. However, when
challenged to evidence these statements it has admitted that it has not actually undertaken
any modelling of these possible impacts5.
Rather than stipulate what constitutes an unacceptable debt burden using DTI and DRI ratios
– as are used in many other countries – the FCA stipulates only that lenders must ensure that
once all non-discretionary payments (household bills and other credit payments) have been
accounted for, borrowers should be left with a ‘basic quality of life’:
“Non-discretionary expenditure referred to in CONC 5.2A.17R includes payments needed
to meet priority debts and other essential living expenses and other expenditure which it
4
N=2555
5
E-mail from the FCA to the Centre for Responsible Credit dated 31 st August.
6is hard to reduce to give a basic quality of life. It also includes payments the customer has
a contractual or statutory obligation to make, such as payment obligations arising under
a credit agreement or a mortgage contract.”
The FCA fails to define even this term, allowing lenders to put in place their own thresholds
which results in inconsistency in lending practice.
What now needs to happen?
The priority must be to secure a fair outcome for Wonga’s customers (both past and current).
As the company has entered administration, it is likely that the loan book will be sold onto a
third party. This will then attempt to collect out debts. However, many of Wonga’s current
customers are likely to have valid claims for their compensation on the basis that Wonga has
failed to conduct proper affordability assessments. In our view, all current customers of
Wonga should be provided with an opportunity to challenge their liability prior to the debt
being sold on and collected out. Government and the FCA should intervene to ensure that
this happens.
It may also be possible for Government to intervene to ensure that people with outstanding
debt to Wonga are now directed to more affordable, and sustainable, credit providers and
provided with debt advice and other support, where needed.
Government also needs to act to ensure the fair treatment of Wonga’s previous customers,
who were overlooked by the FCA’s redress scheme in 2014 and who have not yet made a
claim or who have done so but who have not yet received their compensation from Wonga.
The Government – ultimately responsible for the FCA’s failure in this respect – needs to
ensure that all these customers receive the redress to which they are entitled. The FCA should
assess the full extent of the fund needed to support this.
However, there is also a need to learn the wider lessons from Wonga’s collapse: to assess
both the reasons why the FCA’s redress scheme of October 2014 was inadequate, and why
it’s current approach to irresponsible lending is still failing. In our view, these lessons can only
be learnt once we are in full possession of the facts concerning the FCA’s decisions and they
are held accountable for them. To obtain these, a Treasury Select Committee inquiry should
be conducted immediately.
7Appendix: A brief history of affordability assessments
The FCA became responsible for the regulation of consumer credit in April 2014. Prior to this date,
consumer credit firms were regulated by the Office for Fair Trading (‘OFT’). In 2006, the Consumer
Credit Act 1974 was amended by Parliament6 to ensure that when it licensed firms to provide
consumer credit the OFT considered whether the firm was engaged in ‘irresponsible lending’.
In 2010, the OFT provided guidance7 to firms concerning its approach in this respect including an
expectation that lenders would conduct ‘affordability assessments’ prior to advancing credit which
considered (para 4.1):
“…the potential for the credit commitment to adversely impact on the borrower's
financial situation, taking account of information that the creditor is aware of at
the time the credit is granted.”
Whilst the guidance was not prescriptive in terms of the types of information that a lender should
use for this purpose, the OFT was clear that the information should:
“…be sufficient [for the lender] to make an assessment of the risk of the credit
sought being unsustainable for the borrower in question. In our view this is likely
to involve more than solely assessing the likelihood of the borrower being able to
repay the credit in question. We consider that before granting credit, significantly
increasing the amount of credit, or significantly increasing the credit limit under
an agreement for running account credit, creditors should take reasonable steps
to assess a borrower's likely ability to be able to meet repayments under the
credit agreement in a sustainable manner.”
Further to this, The OFT defined 'in a sustainable manner' as meaning credit that can be repaid by
the borrower:
• Without undue difficulty – in particular without incurring or increasing problem
indebtedness;
• Over the life of the credit agreement or, in the case of open-end agreements, within a
reasonable period of time; and
• Out of income and/or available savings, without having to realise security or assets.
And the OFT also defined 'without undue difficulty' as meaning the borrower being able to make
repayments (in the absence of changes in personal circumstances that were not reasonably
foreseeable at the time the credit was granted):
• While also meeting other debt repayments and other normal/reasonable outgoings; and
• Without having to borrow further to meet these repayments.
However, the OFT failed to enforce these requirements against lenders. From the period from the
introduction of the guidance through to the transfer of responsibility for the regulation of consumer
6
Following lobbying from the Debt on our Doorstep coalition, which was the first body to call for the
imposition of a specific ‘irresponsible lending’ provision in consumer credit law in the UK.
7
8credit to the FCA (in April 2014) we are not aware of a single instance of action being taken by the
OFT against lenders for breach of this guidance.
When the FCA took over responsibility for consumer credit regulation in 2014 it faced the task of
assessing lenders as part of its new permissions regime. This required it to assess the fitness of
lenders against its new rules and guidance and determine whether the firm should be allowed to
trade.
The FCA publishes its rules and guidance for consumer credit firms in its Consumer Credit
Sourcebook (CONC). Section 5 of this stipulates that it is a requirement prior to advancing credit for
firms to:
“...carry out an assessment of the potential for the commitments under the
agreement to adversely impact the customer's financial situation, taking into
account the information of which the firm is aware at the time the agreement is
to be made.”
In addition, the FCA provides guidance to firms that they should make proportionate inquiries into
the financial position of the credit applicant including, for example, in relation to:
• Its own record of previous dealings with the applicant;
• Evidence of income;
• Evidence of expenditure
• A credit score
• A credit reference agency report, and
• Information provided by the customer.
However, lenders are left to decide for themselves which of these sources they use – based on their
own assessment of what is proportionate in the circumstances.
Based on the evidence they obtain the lender is then also left with considerable discretion as to how
low an amount someone can be expected to live on whilst making repayments to their creditors.
Although the FCA incorporated the previous OFT guidance into CONC to try to ensure that firms
assessed whether the applicant has the “ability to meet repayments in a sustainable manner without
incurring financial difficulties or experiencing significant adverse consequences” it expressly provides
in its guidance that lenders can grant credit even if the borrowers is left with sufficient disposable
income to provide for a ‘basic quality of life’:
“Non-discretionary expenditure referred to in CONC 5.2A.17R includes payments needed to
meet priority debts and other essential living expenses and other expenditure which it is hard to
reduce to give a basic quality of life. It also includes payments the customer has a contractual or
statutory obligation to make, such as payment obligations arising under a credit agreement or a
mortgage contract.”
In our view, the current rules and guidance provides lenders with far too much discretion over both
the sources of information that they should consider when making an assessment of affordability,
and the minimum living standard that borrowers should be able to maintain once their debt
repayments and other necessities have been taken into account.
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