Why are so many short term lenders going into administration?
The UK’s short term loans industry has seen more and more established companies going into administration in the last year, causing market concern and a huge gap of individuals looking for loans.
Overlapping with the payday loans industry, in 2013 the sector was worth around £2 billion. But following changes in regulation and the rise in compensation claims, the industry is now worth closer to £200 million and some large names have exited the market in the last year.
The biggest shock came in October 2018 when payday kingpin Wonga fell into administration, just years after it was on the verge of a billion-pound flotation on the stock exchange.
Wonga’s exit was swiftly followed by rivals The Money Shop, WageDayAdvance, QuickQuid, 24 7 Money Box and Piggy Bank. As more and more short term lenders are expected to leave the industry, just why are so many going into administration?
Strict regulation imposed by the FCA
The FCA took over from the Office of Fair Trading as the City regulator in 2014 and implemented a number of new measures in January 2015.
Tacking high-cost lender was one of the main things on the regulator’s agenda and strict reforms were put into place including a daily price cap of 0.8% per day, strict affordability measures and caps for default rates at £15.
A strict authorisation process was put into place for any new lenders looking to enter the market. The lengthy process would often take up to 18 months to become a fully authorised party and came at quite a quite a price, creating a strong barrier to entry. Many lenders and brokers exited the industry in the first two years, simply unable to meet the expectations of the regulator.
Since 2015, the FCA have continued to crack down on payday loans and have been carrying out individual investigations of each lender and reviewing their affordability checks. Further restrictions and fines have been issued to those lenders for not meeting affordability criteria – and it means that the criteria for future loans becomes more stringent.
For many existing lenders, they simply cannot afford to run a profitable business. If they have not been fined already, they cannot make the business model profitable under the stricter price cap and eligibility requirements.
The rise of compensation claims
One of the biggest determinants that has led to payday lenders going into administration is the role of compensation claims.
The Financial Ombudsman opened the industry for anyone to claim who previously had a payday loan and struggled to repay. Accordingly, individuals can claim compensation for the full loan amount and compounded interest, with the average claim worth around £500, although one individual was able to reclaim as much as £20,000.
Wonga alone had to refund over £400 million, although sources suggest that this could have increased to £1.6 billion had administrators not got involved. Quickquid were not far behind with over £50 million worth of claims.
For those claims not dealt with by each lender, individuals could apply for a reclaim through the Financial Ombudsman Service and the lender would have to pay an administration fee of £500, regardless of whether it was successfully claimed or not. For some lenders, this has been hugely expensive and they have had no choice but to go into administration.
What this means for consumers
With some of the UK’s largest lenders exiting the industry, there is now a huge gap in the market for people looking for loans. Customers will have to turn to alternatives such as borrowing money from family and friends, selling items or even using illegals forms of unregulated borrowing.
For those still looking to reclaim compensation for mis-sold loans, the clock is ticking. Your full compensation amount may be available now, but if the lender goes into administration, you may not get anything or only a tiny percentage of it.
If you have an existing loan with a lender currently in administration, you are still liable for repayment and their firm of accountants appointed will be responsible for this.