The high profile company that sponsored amongst others Newcastle United and Ant & Dec’s short-lived ITV quiz show Red or Black.
Digital innovators using cutting-edge mobile technology to let potential customers easily apply and test their own credit worthiness directly from their smartphones?
The short-term loan company that would let people fill the gap between now and payday and pay it back over installment periods of their choice up to £1000 over 31 days?
Or the predatory lending company that used its digital nous to deliberately target the most desperate and indenture them into an amount of debt that they couldn’t possibly hope to pay off, so sinking even deeper into debt?
All of these definitions are true to an extent and despite going into administration in 2018, Wonga are back in the news.
At its height in 2013, the company had over a million customers but it quickly became a high-profile scapegoat for the entire payday loans industry.
The company introduced a new management team in 2014 and wrote off £220m of outstanding debt after admitting that they had approved loans to people they knew could not afford to repay them.
More problematically, due to the nature of high-cost, short-term credit, firms such as Wonga were not covered by the Financial Services Compensation Scheme (FSCS) which financially support investors and customers with accounts in banks and building societies which fail.
Administrators are finally coming close to paying out a dividend to nearly 360,000 customers who were mis-sold loans that they couldn’t pay back, amongst other unsecured creditors. The final figure is £23m which sounds like a lot until you realise that it amounts to 4.3p in the £1.
The administrator said: “As has been explained throughout the course of the administration, the final dividend payment is significantly smaller than accepted claim values, owing to the fact that the total value of all accepted claims significantly exceeded the money available to be shared out.”
What this means in practice is that a customer who was owed £1,200 will only receive £48 and one who is due £7,010 will get £302.
One of the key jobs of an insolvency practitioner is to defend the interests of creditors by raising as much as possible from the sale of assets from a distressed company to repay them.
Their hands are tied a little when it comes to the order that creditors are repaid in. Creditors are divided into different classes depending on their relationship with the company. Some will get a higher priority over others when it comes to the distribution of funds.
The assets are usually distributed in the following order:
The story of Wonga is one of those cautionary tales where nobody gets what they wanted or deserved.
The key is to act quickly if things aren’t working out and if your business is not where it needs to be then get in touch with us.
One of our expert advisors will arrange a convenient, free initial consultation where you can outline what your situation is and what you would like it to be.
We can then work out an efficient and effective plan to get you there or help you work towards more achievable and realistic goals if necessary.
What we won’t do is yes to everything if it won’t work. Wonga ended up where it did because nobody said no when they should have.
As mentioned above, this article will take a look at the future of payday lenders due to the Wonga troubles.
Wonga was originally founded in 2007, just before the credit crunch and the recession in 2008. The company offered easy access loans with repayment terms within 30 days. The concept of payday loans was originally founded in the 1980’s in the USA, when interest rates were deregulated and higher repayments could be demanded. However, payday loans became much more popular in 2008. This popularity followed the failure of Lehman Brothers, when obtaining credit through traditional means became much more difficult.
Wonga reached its peak of business in 2012, when they were seeking to allow instant approval of loans 24/7. The cost for Wonga customers, however, was heavy, with interest rates exceeding 4,000% per annum. Loans of a couple of hundred pounds could quickly spiral, leaving the customer owing thousands. At this peak, Wonga had over 1,000,000 customers in the UK, around 2% of the adult population.
Following this, payday lenders pushed their advertising too far, trying to appeal to consumers to take out their loans to buy luxuries. One of the most criticised campaigns was appealing to students, who would clearly struggle with repayments, to take out loans to go on holiday. 2014 was a particularly bad year for Wonga, which posted losses of £37m following profits of £84m two years earlier:
Losses increased to over £80m in 2015 and continued into 2016. Despite a cash injection of £10m from its shareholders, the payday lender fell into default and entered administration after almost a week of speculation over its position.
Following the FCA changes in regulation, payday lending has already started to evolve into a more customer orientated setting:
Interest rates continue to be high for pure payday loans, still at over 1,000%. This is likely to continue to hold the industry back. The market has taken more to guarantor loans, where interest rates are in the region of 50%. These loans can now be taken over 3 years, making them much more appealing for those with a poor credit rating.
In addition, there has been a significant rise in the availability of credit from more traditional sources. Credit cards are becoming more widely available again, with many firms offering 0% on transfers for 2 years or more. This allows consumers who are deemed credit worthy enough to effectively park debt by juggling their credit commitments.
Unless interest rates drop further, the payday loan may have seen its day. In the USA, where payday loans were created, many states have now banned these loans from being issued. The question remains whether the rest of the world will follow suit.
A common misconception is that when a company enters formal insolvency it ceases to exist. Therefore, the debt due to the company is written off. This is simply not the case. The insolvency practitioner appointed over the case has a duty to creditors to realise all assets to raise funds for distribution.
Customers of Wonga will still be expected to continue to make payments in line with their credit agreements, even with the company in administration. Customers should also bear in mind that, depending on the stance of the administrator, they may accept an offer of lump sum settlement at a discount. This is to save the costs of collecting and chasing the loan over time.
With Wonga now in administration, those who are still due compensation may be wondering how they would get paid. Under normal circumstances, when a company goes into administration, anyone with a claim against the company would be an unsecured creditor. This can leave them amongst a pot of hundreds, or thousands of other creditors. These are also unlikely to receive a return, with preferential and secured creditors being paid first.
In the event an FCA regulated firm enters formal insolvency, the financial services compensation scheme (FSCS) will cover any amounts due in compensation up to £85,000. Generally, the FSCS covers:
However, the FSCS does not cover long agreements and compensation surrounding these agreements. Therefore, anyone still owed compensation will have to wait to see if there will be any distribution to unsecured creditors in the administration, regardless of how far the claim has progressed.
The team at Business Rescue Expert have dealt with multiple FCA regulated companies who have experienced financial difficulties and can be contacted for expert advice if you have an FCA regulated business experiencing similar difficulties to Wonga.