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Wonga ordered to pay £2.6m compensation after using fake law firms to chase debts Wonga ordered to pay £2.6m compensation after using fake law firms to chase debts
(about 11 hours later)
The UK's biggest payday lender Wonga has been ordered to pay more than £2.6 million in compensation after it was found to have chased customers' debts using letters from fake law firms. The payday lender Wonga is facing the prospect of a criminal investigation after City watchdogs handed police a file detailing how the company lied to hard-up borrowers.
As part of a series of "unfair and misleading debt collection practices", the company pretended to be writing from non-existent law firms when it threatened people who were in arrears with legal action. Wonga, famed for its 5,853 per cent APR and criticisms from the Church of England, was found by the Financial Conduct Authority to have sent threatening letters from two fictional law firms to customers in arrears. It even made some clients pay for sending them the fake letters.
Wonga even added extra charges to some customers' accounts to cover its own administration costs for sending the letters. The Labour MP Stella Creasy, who has been campaigning against payday loan companies for years, demanded a full police inquiry after the regulator merely ordered Wonga to pay compensation of £2.6m to the 45,000 people who received the letters. A loophole meant it did not even receive a fine.
The findings come from an investigation by the Financial Conduct Authority (FCA), which accused Wonga of "exacerbating an already difficult situation" for customers struggling with their debts. The customers received letters claiming to be from “Chainey, D’Amato and Shannon” and “Barker and Lowe Legal Recoveries”, with the intention of making them believe their debts had been passed on to law firms which could sue for the money. Impersonating a solicitor is a criminal offence.
It said consumers were put under "great pressure" by the threats from fake firms to make loan repayments that they could often not afford. Tonight, FCA sources confirmed it had handed over its documentation on the case to police investigators to assess if any offence may have been committed. Ms Creasy said: “Wonga has got off very lightly. There are at least four potential criminal acts that should be investigated for this unbelievable behaviour.”
Wonga contacted customers in arrears under the names of two pretend companies, 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 other third party. Further legal action was threatened if the debt was not repaid. The police should investigate whether Wonga has breached laws banning impersonating a solicitor, harassing those whom you have lent money, making false claims or falsely representing themselves to be authorised in an official capacity, Ms Creasy said.
The company has apologised for the practice, which took place between October 2008 and November 2010. It will be made to repay around £400,000 for the "referral" charges it levied on customers, and a further £50 payment each to the 45,000 people who were sent letters for the "distress and inconvenience" caused. Labour will be seeking to table a question in Parliament today demanding to know how much ministers knew of Wonga’s behaviour during previous parliamentary investigations into the payday loans industry. The fake letter scandal was originally uncovered – although not publicised – in an investigation by the now-defunct Office of Fair Trading back in 2011. The absorption of the OFT into the City watchdog, the Financial Conduct Authority, was the reason why there could be no fine or full publication of the investigation’s findings, the FCA and Treasury said.
Tim Weller, interim Wonga CEO, said: "We would like to apologise unreservedly to anyone affected by the historical debt collection activity and for any distress caused as a result. Questions will inevitably now be asked about how much the Conservative Party adviser Adrian Beecroft knew about the scandal. As well as being a major donor to the Conservatives, he is a big financial backer of Wonga through his Dawn Capital private equity fund.
"The practice was unacceptable and we voluntarily ceased it nearly four years ago." Wonga’s former chief executive Niall Wass quit recently after just six months in the job. The firm’s founder and chairman, the charismatic Errol Damelin, also announced he was planning to step down earlier this month.
The FCA said that its agreement with Wonga meant the lender will actively track down and contact all those affected. Some will receive cash while it is likely others will have their outstanding balance reduced, the watchdog said. Labour is also expected to demand publication of the full findings of the OFT/FCA investigations amid widespread dissatisfaction that the regulator only issued a brief press release and one-page supporting document. Despite its own APR of 5,853 per cent, Wonga has only been forced to repay hard-up borrowers it misled and overcharged, at a rate of 8 per cent.
It will oversee the process to ensure people receive the money they are owed, and indicated that depending on individual circumstances there may be additional compensation payments made. Consumer groups and charities called for further punishment for Wonga. Richard Lloyd of Which? said: “It’s a shocking new low for the payday industry that is already dogged by bad practice and Wonga deserves to have the book thrown at it.”
As part of its preparations for the FCA regulation, Wonga said it had also discovered technical errors which meant just under 200,000 customers had overpaid the company. Mike O’Connor, chief executive of StepChange Debt Charity, added: “It’s time the payday loan industry entered the 21st century in terms of treating customers fairly. If they cannot, they should leave the market.”
It said it was contacting these customers to offer compensation, adding that the majority overpaid by less than £5. Martin Lewis, founder  of MoneySavingExpert.com said: “It just shows that while Wonga hires expensive marketing, PR and public affairs consultants to try to position itself as ‘the good guys in a bad industry’, it’s all a sham. Using lawyers as fake as its puppets, then having the stomach to charge people for it is a thuggish tactic, aimed at scaring and intimidating people who are already struggling.”
Summarising both blunders, Mr Weller said: "We will learn from these mistakes and continue working with the FCA to build a better Wonga for the benefit of our customers. We're strengthening our internal controls and systems and now have almost 1,000 people around the world, who are working hard to serve the demand for short-term credit in the most responsible way possible." The legal letters – which were sent between October 2008 and November 2010 – were uncovered by investigators at the Office of Fair Trading after it examined Wonga’s debt collection practices in 2011. But the former watchdog was not able to complete its case by the time it was disbanded earlier this year and rolled into the FCA.
In 2012 alone, Wonga made nearly four million loans to more than one million customers. The entire payday loans industry has been referred by the Office of Fair Trading for a full-scale probe of its "deep-rooted" problems, and the full findings of that investigation are due to be published later this year. The casebook was passed on in April but the new City watchdog said it could not fine companies retrospectively using legislation that was not in place. “We simply can’t fine someone we didn’t regulate,” a spokesman said.
Ms Creasy added: “Ministers were telling campaigners like me the industry was working well when all along this kind of stuff was happening.”
The FCA pointed out that, as part of a voluntary agreement with the regulator, Wonga must offer a £50 distress and inconvenience payment to the 45,000 customers who received the fake letters. Around £400,000 of fees will be repaid to them, the lender said. Tim Weller, interim Wonga chief executive, said: “We would like to apologise unreservedly to anyone affected by the historical debt collection activity and for any distress caused as a result. The practice was unacceptable and we voluntarily ceased it nearly four years ago.”
Wonga also admitted that it has miscalculated charges, meaning almost 200,000 borrowers overpaid the company, although the majority by less than £5, it said. Mr Weller also said sorry for the overcharging. “I would also like to apologise to customers affected by our system errors. We fully accept the impact on customers was negative in many cases.”
Clive Zietman, a partner of Stewarts Law, said: “There could be a case to answer under the Fraud Act which prohibits fraud by false representation.”
What Wonga will do next: Redress for borrowers
The company has promised that it will be attempting to contact all the 45,000 customers targeted by the fake legal letters.
It also promised to try to track down the 200,000 customers who had been overcharged more recently by the lender. Given that the first offences took place between 2008 and 2010, it’s possible that the victims may have moved since then.
Borrowers misled were sent a letter headed “Chainey, D’Amato & Shannon” or “Barker and Lowe Legal Recoveries”, mentioning legal action. But both lawyers’ names were made up. Wonga is urging anyone who thinks they may have been a victim to update their contact details with the company by going to wonga.com/apology.
Alternatively you can call the company’s helpline on 0800 8400836.
Simon Read