NEWCASTLE United’s shirt sponsor, payday lender Wonga, is to pay more than £2.6m in compensation to 45,000 customers for “unfair and misleading debt collection practices”.
The UK’s biggest payday lender was found to have sent letters to customers in arrears from non-existent law firms threatening legal action, the Financial Conduct Authority (FCA) said.
In some cases, Wonga added charges to customers’ accounts to cover administration fees for sending the letters.
Wonga apologised “unreservedly” for the failings, which took place between October 2008 and November 2010.
The FCA said consumers were put under “great pressure” from communications sent by fictitious law firms to make loan repayments that many could not afford.
Wonga contacted customers in arrears under the names Chainey, D’Amato & Shannon and Barker and Lowe Legal Recoveries, leading customers to believe that their outstanding debt had been passed to a law firm, or other third party. Further legal action was threatened if the debt was not repaid.
Neither of these firms existed and Wonga was using this tactic to maximise collections by piling the pressure on customers, the regulator said.
Tim Weller, interim Wonga CEO, said: “We would like to apologise unreservedly to anyone affected by the historical debt collection activity and for any distress caused as a result.
“The practice was unacceptable and we voluntarily ceased it nearly four years ago.”
In 2012 alone Wonga made nearly four million loans to more than one million customers.
The agreement it has come to with the FCA means that it must identify and pay redress to everyone affected. Some customers will receive cash, others are likely to have their outstanding balance reduced.
The FCA, which has been clamping down on the payday loans sector since it took over its regulation in April, will oversee the process to make sure people receive the money they are owed.
Customers who have been affected do not have to take action as Wonga will be pro-actively contacting them. All 45,000 customers who were sent letters will be offered a flat rate of £50 for their distress and inconvenience. On top of this, those who were charged fees for the letters will be refunded. Customers are estimated to have paid £400,000 in charges for being referred to the fictitious law firms .
In some cases, additional compensation payments may be made, depending on individual circumstances.
The process will start by mid-July with compensation likely to be paid from the end of July.
Wonga said that while reviewing its records in preparation for FCA regulation, it has also discovered technical errors, unrelated to the historic debt collection practices, which have resulted in just under 200,000 customers overpaying the company.
Wonga said it is now also contacting these customers to offer compensation, and the majority overpaid by less than £5.
It said that a greater number of people underpaid as a result of these technical errors, but it will not be seeking repayments from anyone who underpaid.
Mr Weller continued: “I would also like to apologise to customers affected by our system errors.
“We fully accept the impact on customers was negative in many cases and our priority is to ensure we deal quickly and fairly with customers who’ve been impacted, again in conjunction with the FCA.”
Summarising both blunders, he added: “We will learn from these mistakes and continue working with the FCA to build a better Wonga for the benefit of our customers.
“We’re strengthening our internal controls and systems and now have almost 1,000 people around the world, who are working hard to serve the demand for short-term credit in the most responsible way possible.”
Wonga’s poor practice was originally uncovered by the Office of Fair Trading (OFT) which previously regulated the payday loans market before responsibility was handed over to the FCA.
“The OFT had asked Wonga to disclose certain information about its debt collection practices.
The OFT referred the whole payday loans industry for a full-scale competition probe after finding “deep-rooted” problems.
The Competition and Markets Authority (CMA) is due to publish its full findings from that investigation later this year.
In April this year, Wonga also reported the technical errors it had discovered to the FCA.
Clive Adamson, director of supervision at the FCA, said: “Wonga’s misconduct was very serious because it had the effect of exacerbating an already difficult situation for customers in arrears.
“We are pleased that Wonga has been working with us to put matters right for its customers and to ensure that these historical practices are truly a thing of the past.
“The FCA expects firms to pay particular attention to fair treatment of those who have difficulty in meeting their loan repayments.”
Wonga said any of its customers who think they may have been affected should ensure the company holds the most up-to-date contact details for them. They should visit wonga.com/apology to do so.