Failed High-Cost Lenders have struggled to pay mounting levels of compensation from Payday, Guarantor and Doorstep claims. This compensation is mainly due to irresponsible lending as a result of the loans being unaffordable. This is when borrowers can’t afford the loan, according to the regulator, the lender should not have approved it.
The redress that lenders have had to pay customers has resulted in previously very profitable companies becoming insolvent. This has resulted in some going to administration and others setting up schemes to pay customers. In both cases, customers get paid less than they would if the lender were solvent. We look at some of the lenders that have become insolvent due to paying these complaints and what happened to the customers seeking refunds.
Wonga was a former British payday loan firm that was founded in 2006. The company focused on offering short-term, high-cost loans to customers via online applications. The APR it charged was over 1,500%, though most loans were lent only for a few days.
On 30 September 2014, Wonga announced that its profits for the previous year had fallen by 53% to £39.7 million. The company blamed the cut in profits on “remediation costs” (compensation paid to customers). This cost the company £18.8m. Wonga predicted its profitability would be reduced through new controls set out by the Financial Conduct Authority (FCA) from June of that year. To conform to rules set out by the FCA, Wonga limited roll-overs of loans and increased affordability checks. Price caps were also introduced from the start of 2015.
After tougher regulations on the payday loan sector, the firm doubled its loss. Its UK consumer base was greatly reduced. By the end of 2015, the company reported a pre-tax loss of £80.2m for the year. This was up from £38.1m the year before. In April 2017, Wonga suffered a data breach that affected around 245,000 of its customers in the UK. The range of information stolen in the breach included details on customers’ bank cards.
In 2018 the CEO warned Wonga was in danger of becoming insolvent due to a surge in customer compensation claims. It received an emergency £10m cash injection from shareholders as a result. On 26 August, Grant Thornton was lined up to act as the administrator in the event Wonga becomes insolvent. They assumed their responsibilities the day after the firm went into administration on 30 August.
Grant Thornton focused on conducting a wind-down of the business that would involve the sale of assets and identifying creditors, along with handling claims for compensation. By March 2019 the number of claims had increased from around 10,500 to over 40,000 since the firm’s collapse. The lack of assets and the volume meant that many claimants were likely to receive much less than they were entitled to.
By January 2020, the number of claimants was 358,000. They will share around £23m in compensation, around 4.3% of what they were owed.
Quick was another UK payday loan company founded in 2014. They are owned by CashEuroNet UK who also owned Pounds to Pocket and Onstride.
Around 78,500 QuickQuid and Pounds to Pocket borrowers, who were mis-sold loans they couldn’t afford, are expected to receive refunds of some of the interest and fees they were charged. But they’ll only get back up to half of what they paid – and some will receive less than a third.
In its latest progress report, joint administrators at Grant Thornton revealed that affected borrowers are likely to receive a payout of between 30% and 50% of their compensation. These refunds are expected to be paid by the end of March 2022.
The update comes after CashEuroNet went into administration in 2019.
Provident Consumer Credit
Provident Consumer Credit is the consumer credit decision of Provident Financial, who are publicly listed. Their main brands include Provident and Satsuma Loans.
Following a court ruling in August 2021, borrowers who were mis-sold doorstep loans by Provident Financial can receive some of their money back. Under a new compensation deal, anyone who took out a loan with Provident, Satsuma, Greenwood and Glo between April 6, 2007 and December 17, 2020 could be eligible for a refund.
The ‘scheme of arrangement’ system allows customers with outstanding claims to be refunded. But the lender thinks it can only repay an average of 5-10% of any disputed loans.
Provident asked the High Court in London to sign off on the scheme because it was unable to refund all the customers making complaints. Around 4.3 million loans are covered by the cash pot, of which Provident has put aside £50million, and were all issued between April 7 2007 and December 17 2020.
Amigo was previously the UK’s largest guarantor lender. They are a publicly listed company and once had a market capitalisation of over one billion pounds. They saw complaints against it grow from about 500 in 2019 to more than 13,000 in 2020, according to the Financial Ombudsman Service.
As a result of these complaints, last December Amigo proposed a “scheme of arrangement”. This scheme would limit payouts and ultimately help it to avoid going into administration.
However, the lender’s rescue plan was rejected by the High Court at the final stage of the approval process. The regulator the Financial Conduct Authority said it believed the scheme as proposed was “inherently unfair”. They stated that a fairer compromise could have been offered to customers but was not. Previously, a High Court hearing and a creditors’ meeting gave approval for the scheme.
Amigo’s Second Attempt
Now Amigo has announced a new scheme. This is Amigo’s attempt to find a better solution. It’s worked with a committee of eight randomly selected customers and guarantors to help them draw up this new proposal. They hope that it presents a fairer option for customers.
Unusually, Amigo’s proposal includes two different schemes, which will eventually be voted on by borrowers:
With option 1, the ‘new business’ scheme where claimants are predicted to get back 42p of every £1 they’re owed. This is Amigo’s preferred scheme because it’ll get to continue as a business. But there are two conditions: Amigo will need to be able to recommence lending within nine months of scheme approval, AND it will need to raise £70 million in the first 12 months of operating. If these two conditions aren’t met, Amigo will automatically revert to option two.
With option two, the ‘wind-down’ scheme where claimants are predicted to get 29p of every £1 they’re owed. This is essentially a controlled closure of Amigo’s business.
Full details of both schemes can be found on Amigo’s website. However, payouts are only predictions at this stage, based on the number of claimants owed money and the average amount owed. For example, the 42p per £1 payout is based on an estimate that an additional 82,000 complaints will be submitted, with 65% of these being upheld, and claimants being owed £4,500 on average.
The amount that’s actually paid out will depend upon how many people end up complaining, and what percentage of these complaints are upheld.
Claiming A Refund
Payday loans and other short-term credit loans have been widely mis-sold. If you couldn’t afford to repay the loan, or the lender failed to check your finances properly, you may be able to reclaim £100s or even £1,000s. However, many borrowers are now getting back less than they are owed as mis-selling claims have pushed lenders into administration. You can complain to the lender yourself or get help from a claims company (who work on a no win no fee basis).