Faced with new regulatory costs, the UK’s best known payday lender, Wonga, has announced that it made a pre-tax loss of £37.3 million in 2014. This compares to a pre-tax profit of £39.7 million in 2013, and the firm is predicting it will again lose money in 2015.
The firm fell foul of the new consumer credit regulator, the Financial Conduct Authority (FCA), on two occasions in 2014. Firstly, it was forced to pay £2.6 million in ‘distress and inconvenience’ payments to 45,000 customers who received debt collection letters purporting to come from law firms – firms which did not exist. Then the firm reached agreement with the FCA to write off some £220 million of loans made to 375,000 customers, on the grounds that the loans would not have been granted under new lending criteria.
These new lending criteria resulted in a 36% fall in lending volumes, from £1.1 billion to £732 million. The actual number of loans granted to UK customers fell by almost a third, from 3.7 million to 2.5 million; and total customer numbers are down from around one million to 575,000. Overall revenue fell by 31% in 2014 to £217.2 million.
The FCA introduced a series of tougher rules for payday lenders when it took over as consumer credit regulator in April 2014. Lenders are now subject to additional requirements when assessing affordability, as well as restrictions on use of Continuous Payment Authority and rolling over of loans. The FCA also has additional resources to supervise firms, compared to the previous credit regulator, the Office of Fair Trading.
These new compliance requirements have contributed to a 12% increase in Wonga’s operating costs, and in 2015 Wonga has already announced the loss of 325 jobs, more than a third of its total workforce. The FCA has admitted that it expects to see a number of payday lenders exit the market as they struggle to remain profitable.
Since January 2015, payday loans have also been subject to an interest cap of 0.8% per day.
Wonga’s Chairman Andy Haste said: “We said Wonga would be smaller and less profitable in the near term as we focus on creating a sustainable business that lends responsibly and transparently to customers who can afford to borrow from us.
“We know it will take time to repair our reputation and gain an accepted place in the financial services industry.”
He added that he believed it was still possible for a payday lender to remain profitable in the new environment.
Wonga is expected to announce later in the year that it will start offering loans over longer periods than the traditional one-month payday loan.
Wonga has committed to a number of changes to its business practices since Mr Haste took the helm in July 2014. Measures include: new lending criteria, ceasing to use the elderly ‘puppet’ characters in the firm’s advertisements, and removing the firm’s name from children’s Newcastle United replica kits.
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