The UK's Financial Conduct Agency has imposed a huge penalty on Wonga, a payday loan company, for their practices. For failing to properly assess if the lenders could repay, they are being forced to write off loans worth £222 million (US$366 million) for 220,000 lenders. Anyone in arrears who would not have qualified for a loan under the new regulations will have it written off. A further 45,000 in short term arrears will not be charged interest and will be able to pay off over an extended period. This is on top of a ruling earlier this year that they pay compensation for sending fake "solicitors" letters threatening legal action.
You may well be familiar with the problems these payday loan companies cause in poorer communities. The BBC explains their position in Britain.
Pay day lenders first appeared in the US, but are only legal in 27 states and interest rates are generally limited to 40%. They began appearing in the UK 20 years ago, and there are currently no limits on their charges here - although the government wants to bring in a cap next year. Wonga itself is only seven years old but has become the best known thanks in part to its catchy advertising.
All pay day lenders normally lend to those not welcome elsewhere, because their poor credit rating or low income means mainstream lenders see them as unlikely to repay any loan. Since the downturn their business has expanded rapidly, leading to criticism they are making millions lending to the desperate. Some say they are little more than legalised loan sharks, but supporters say if they did not exist, hard-pressed people would have to borrow from real loan sharks.
In contrast to the limits in the USA, because charges and late payment fees have to be rolled up into the calculation, the interest rates at Wonga can be up to
5,853% (Interest rates of over 1000% are normal for similar companies)
Earlier this year Wonga were ordered to pay £2.6m in compensation they had sent letters to that purported to come from a legal firm but were, in fact generated internally.
The Financial Conduct Authority (FCA) said Wonga had been guilty of "unfair and misleading debt collection practices" after it emerged the lender had created fake companies, using the names of employees who in some cases still work for the lender. The regulator said the firm would be compensating customers who received the letters, which threatened legal action over outstanding debts.
Wonga escaped an FCA fine because the regulator only started policing payday lenders in April 2014, and these practices occurred while the now defunct Office of Fair Trading (OFT) was in charge. But files relating to the case have been passed on to the police.
The exploitation of the working poor is so bad that also earlier this year the Church of England started a campaign and created a credit union. (Although not before they had divested the
indirect investments they had in Wonga!)