UK's Largest Payday Lender to Pay $4.4 million Over Debt Collection Letters

Wonga, the UK’s biggest payday lender, has entered an agreement with banking regulator the Financial Conduct Authority (FCA) which will see it pay compensation of over £2.6 million ($4.4 million) to around 45,000 customers for unfair and misleading debt collection practices.

In an investigation begun by the UK’s Office of Fair Trading (OFT) and taken forward by the FCA, Wonga was found to have sent collection letters threatening legal action from non-existent law firms to customers that were behind in payments. Wonga also added charges to some customers’ accounts to cover the administration fees associated with sending the letters.

The practices, which were alleged to have occurred between October 2008 and November 2010, were deemed “very serious misconduct” by British regulators.

“Wonga’s misconduct was very serious because it had the effect of exacerbating an already difficult situation for customers in arrears,” said Clive Adamson, director of supervision at the FCA. “The FCA expects firms to pay particular attention to fair treatment of those who have difficulty in meeting their loan repayments.”

Wonga sent debt collection letters to customers in arrears on the letterhead of “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 third party collection agency. The letters explicitly threatened further legal action if the debt was not repaid.

But an investigation found that neither Chainey D’Amato & Shannon nor Barker & Lowe existed and Wonga was using the tactic to pressure debtors.

The FCA said that Wonga is the UK’s biggest payday lender; in 2012 it made nearly four million loans to over one million customers.

Wonga must identify and pay redress to all affected customers. While some customers will receive cash, others will likely have their outstanding balance reduced. The agreement calls for a flat rate £50 ($85) settlement offer to all 45,000 customers sent letters and the potential for additional payments to certain customers. In addition, any legal referral fees collected from consumers who responded to the letters – around £400,000 – will be repaid.