Wonga’s founders set up the company to serve cash-strapped borrowers just as the UK was headed for financial collapse in the financial crisis of 2008. But the now-disgraced lender – which charged some vulnerable customers interest rates of up to 5,000 % – became a lightning rod for controversy before its collapse in 2018 and sparked a regulatory crackdown on the UK’s unscrupulous payday loan market. Since then, the market once dominated by Wonga has almost halved. More than 50 businesses have collapsed or closed voluntarily. No new payday loan providers have received regulatory approval to operate since then, leaving fewer than 40 high-cost, short-term lenders operating. While consumer advocates cheered their steady crackdown, questions have been raised about where the country’s most vulnerable households could turn to make ends meet. Amid the cost of living crisis, some industry figures say a more tightly regulated payday loan sector could play a role. Regulators the Financial Conduct Authority (FCA), the City watchdog, raised concerns earlier this year about the relatively small number of high-cost lenders left in the market for borrowers who don’t meet the lending criteria for mainstream banks. At its meeting in May, FCA board members said the cutback in high-cost lenders, “with rising inflation … is likely to trigger a number of points where consumers will need access to money quickly and options would be limited”. With the decline of the payday loan market, hopes were raised that more socially responsible options such as credit unions and nonprofit community development financial institutions could fill the gap. However, there are concerns that they will struggle to scale quickly enough to help everyone who needs financial support in the coming months. Fears have been raised that more people could turn to illegal moneylenders to make ends meet. According to the Center for Social Justice, the think tank co-founded by former Conservative leader Ian Duncan Smith, more than 1 million people now use illegal payday lenders in England. Others are turning to unregulated but legal forms of lending, such as buy now pay later (BNPL) schemes run by companies such as Klarna, Clearpay and Laybuy. Although borrowers are often not charged interest on their purchases, buyers still run the risk of overextending themselves with debt. Companies are not required to offer forbearance or compensation when things go wrong. “This cost of living crisis is potentially the most worrying I can remember in my 25-plus years as an activist,” says Mick McAteer, former FCA board member and co-founder of the Financial Inclusion Center think tank. “So the risk of people turning to loan sharks can increase. Wonga collapsed in 2018. Photo: Dominic Lipinski/PA “[And] While BNPL may not have the kind of exorbitant, exploitative terms and charges like payday and other sub-prime loans, the product encourages over-borrowing. This is bad for consumers in the long run.” Research released by Barclays Bank and debt charity Stepchange in June found that almost a third of BNPL borrowers said their loans had become unmanageable and pushed them into problem debt. Shoppers using BNPL paid for an average of 4.8 purchases – almost double the 2.6 purchases in February, the survey found. With concerns about illegal and unregulated lending growing, some high-cost lenders are claiming to offer safer options for borrowers, despite years of allegedly mis-selling loans to vulnerable borrowers. Jason Wassell, head of high-cost credit lobby group the Consumer Credit Trade Association, says there is still a market place for private lenders. “At this point already, demand far outstrips supply,” he says. “What we have seen in recent years is the withdrawal of several lenders. This has led to reduced access to alternative credit and this is causing a problem for families across the UK, particularly those who have been underserved or not very well served by banks in the past.’ Executives at guarantor lender Amigo – which allows friends and family to guarantee and agree to cover any defaulted loans for cash-strapped borrowers – say they have learned their lesson after a deluge of affordability claims almost pushed Amigo into collapse, forcing to stop lending at the beginning of the coronavirus pandemic. Jake Ranson, Amigo’s chief customer officer, says his team is “not an apologist for Amigo’s past practices or products”, which included selling unaffordable loans to customers, which were typically charged around 49.9% interest . It now hopes the FCA will give them the green light to restart lending under a new brand, RewardRate, as early as September, offering new features such as lower interest rates if borrowers make payments on time. “We’re going to do gun affordability trials, using things like open banking and making sure customers are talking to a human being … and that they understand the responsibility that comes with owning the product,” says Ranson. “It’s a very different proposition.” With concerns about illegal and unregulated lending growing, some high-cost lenders claim to offer safer options for borrowers. Photo: Dominic Lipinski/PA However, consumer activists are concerned. Sara Williams, of the blog Debt Camel, is skeptical that the wider high-cost credit industry is any safer or more suitable for vulnerable consumers, even after the regulatory crackdown. “Debt rarely helps in this situation,” he says. Rather than a reboot of the payday lending market, more government support for struggling families is vital, he says. In the interim, consumers would be better off considering debt management plans for any existing borrowing. Last year, 4.4 million people across the UK borrowed money to make ends meet, according to figures from StepChange. Some 71% said their use of credit had negatively affected their health, relationships or ability to work, while two-thirds said they were only able to keep up with payments by skipping or cutting back on housing or utility bills at the point of difficulty. at risk of further financial loss. We’re seeing a welcome increase in the number of people using credit unions and other not-for-profit lenders, Mick McAteer of the Center for Financial Inclusion StepChange said the risks facing vulnerable borrowers were not due to a lack of high-cost lenders in the market. Instead, he pointed to the lack of other options available when consumers were hit with unaffordable bills or unexpected costs. “Turning to sub-prime lenders should be a last resort,” says McAteer, adding that it is problematic that the UK has failed to create a “bigger non-profit lending sector” to deal with the current crisis. Not-for-profit social enterprises only lend £25m a year and serve just 35,000 customers on average. Despite their declining presence in recent years, lenders managed to lend around £60.4m in the first quarter of 2022 alone, according to the FCA, while home collection lenders lent around £95m in the last quarter of 2021 . “We’re seeing a welcome increase in the number of people using credit unions and other nonprofit lenders. The credit union’s membership now exceeds 2.1 million. But it’s not enough,” says McAteer. “There is a real possibility that nonprofits will financially outperform commercial sub-prime lenders backed by private financial institutions. “We need emergency measures to help households survive the crisis and then medium-term measures to help people build financial resilience against future shocks to come. We have made almost no progress in building economic resilience since the crisis of 2008. Will we learn the lessons?”
