Wonga has entered into an agreement, known as a voluntary requirement (VREQ), with the Financial Conduct Authority (FCA) that requires it to make significant changes to its business immediately.
Reading between the lines, the FCA says that Wonga aren't doing enough to check people's ability to pay back their payday loans. Roughly 375,000 customers will now be released from punitive debt interest as a result, 330,000 of which have arrears of over a month - for them, the entire debt is being written off. That's 375,000 people who Wonga now admits it shouldn't have lent to in the first place. Their website now acknowledges the 5000%+ annual interest rate that Wonga previously deemed 'irrelevant'. It doesn't look at the moment as though the interest rate is changing, but they will be lending to fewer people.
Wonga made 4.6m loans last year, so the write-off amounts to 8% of the total number of loans in a year, and will cost them £220m. That's more than 5x their declared annual profits from 2013. At this rate Wonga could be out of business before Justin Welby has time to say Amen.
More from the FCA:
“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.
Wonga's press release in response is mildly worded mea culpa "we recognised that we may not have always made the right lending decisions, and on reflection some of these loans may not have been affordable", i.e. we were bleeding people dry who couldn't afford the repayments and we've finally been had up for it.
Wonga's publicly stated priorities, after cutting out lending to vulnerable customers, include a plan 'to address the total cost of credit' Hopefully the next wave of the Welby effect is an end to usurious rates of interest. After that, we need an end to advertising during childrens TV programmes - the TV watchdogs need to step up to the plate now that the FCA have shown how its done.
And finally how about a few more stories about credit unions, so that people know there is an ethical alternative to branded debt sellers.
If you live locally, here's a couple for starters: