Wonga – perhaps the most well known of the payday lenders - has announced it has gone into administration.  It followed weeks of speculation that the company was itself, ironically, struggling to stay afloat despite a £10m cash injection from its shareholders.

Wonga blamed a rise in compensation claims made by borrowers of their short term payday loans.  The Financial Ombudsman Service said it had received over 10,000 complaints in the first quarter of 2018 about payday loans and the manner in which they are sold, a huge rise on the year before.  This increase is largely due to claims management companies actively seeking out borrowers to pursue compensation, much like the PPI claims companies.

How did a company who posted profits of £80m+ only a few years ago and which hailed its services as the financial future come to end up in administration? 

Wonga began to feel the pinch itself from 2014 onwards when the Financial Conduct Authority ruled that Wonga had to pay compensation in the region of £2.6m to some of its customer on the basis of their “unfair” trading practices, which included sending false legal letters to its customers.

The pressure increased the following year when new rules came in to prevent payday lenders from charging the exorbitant interest rates with which their services had become synonymous.  These were reportedly over 5000% in some cases.  This meant that often Wonga’s customers would have to repay a debt in the thousands when they had needed a short term loan of a couple of hundred pounds to tide them over. It should be noted that the interest rates are now capped at 0.8% per day, which can still be ruinous for some borrowers.

Once the regulator imposed a cap on interest rates, Wonga’s profits crumbled and the company reported losses of £37m in 2014 and they have subsequently not recovered nor posted a profit since.  The easy gravy train had come to an end and the company posted annual losses of increasing amounts over the next three years.

The recent cash injection designed to keep the company afloat did little to change Wonga’s fortunes and so on 31 August, Grant Thornton was appointed as administrators.

What does this mean for existing Wonga borrowers?

The advice on Wonga’s website is that all existing loans must continue to be serviced in the normal way – it is estimated 200,000 people still owe more than £400m to the company.  However, for those making claims against Wonga for unfair practices, the Financial Conduct Authority will no longer investigate these allegations. Any existing borrowers waiting on compensation to be paid to them will join the queue as an unsecured creditor in the administration and are unlikely to receive any of the amounts which they may have been due.

Often when a well known company goes into administration, there is often a period of “mourning” in the media – however in the case of Wonga, politicians, celebrities and even the Archbishop of Canterbury have been lining up to dance on Wonga’s grave. As news of the administration broke, the Just Finance Foundation, the Archbishop of Canterbury’s charity, declared “Today we are seeing the result of the much-needed tougher financial regulations starting to bite”.  Martin Lewis, founder of MoneySavingExpert.com went further: “Normally when firms go bust, the fear is diminished competition. Not here. Wonga’s payday loans were the crack cocaine of debt – unneeded, unwanted, unhelpful, destructive and addictive. Its behaviour was immoral, from using pretend lawyers to threaten the vulnerable, to pumping its ads out on children’s TV.”  Whilst we may spare a thought for Wonga’s employees who now face redundancy, there can be little doubt that operations such as Wonga have changed the landscape of the financial market for the average consumer, arguably not for the better.

Unfortunately, the need for payday loans has not gone away and Wonga’s demise does not bring the payday lending market to a halt – since the global recession of 2008, traditional lines of credit have been closed off and our society’s need for instant gratification and easy credit to meet the squeezed family’s wants and necessities have fuelled the rise and rise of payday lenders.  It is estimated that two million people have used a payday loan and the real danger is that people seeking short term credit will go to other even less scrupulous organisations.  Similarly, the claims management companies who pursued Wonga for compensation will turn their attention to other payday lenders and so the cycle of administrations may not yet be over.  The Wonga administration and its after effects may prove to be a pivotal time in the regulation and management of the payday lender sector.