The controversial short term loans industry in the UK is at risk following a new wave of compensation claims for mis-sold loans and bogus claims.
In August, we reported about Israeli-backed firm Wonga.com seeking a £10m investment to overcome compensation bills. The company has since confirmed that it is going into administration and is no longer accepting new applications.
The new rise in compensation claims comes as the PPI deadline approaches in August 2019 and claims management companies have set their sights on the high cost payday loans industry and a way for ex-customers to receive refunds from their loans.
Wonga.com has refunded over £220 million to ex-customers since 2014 who were sold loans that they could not afford – perhaps due to having adverse credit histories, being on benefits or unemployed.
Customers who believe that they were granted expensive loans are able to reclaim on the basis that insufficient affordability checks were carried out. The average claim pay-out is around £300 plus a commission for the claims management company that handles the case.
Other companies in the industry have also been overwhelmed with the number of customer complaints including Sunny, Peachy and QuickQuid.
This week, Jonathan Davidson of the Financial Conduct Authority, wrote in a letter to sector chiefs that companies should “consider whether it is fair and reasonable for the firm to proactively undertake a redress or remediation exercise, which may include contacting customers who have not complained.”
In response, the Consumer Finance Association that protects and acts on behalf of lenders, highlighted the lenders’ awareness of reviewing affordability for potential loans and taking treating customers fairly very seriously. The CFA also outlined the rise in complaints due to aggressive claims management companies and referred to an example from lender Sunny that out of 148 recent complaints, only 29 were legitimate customers.
Not only are claims expensive because they are refunding the customers but any complaint sent to the Financial Ombudsman Service also incurs a £500 administration fee to the lender – which is where the main financial burden lies.
The high cost credit industry was once worth an estimated £2 billion in its prime in 2013, but recent studies show that the short term loans industry is worth just a fraction of that today.
With rising claims, we might find more and more lenders going out of business or not offering loans, giving an opportunity to new alternatives with more competitive rates to emerge.