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All change for affordability criteria?
Financial Services analysis: What could Wonga entering into a voluntary requirement with the Financial Conduct Authority (FCA) mean for other payday lenders? Jacob Ghanty, partner within Berwin Leighton Paisner's financial regulation practice, analyses the significance of the case.
Wonga enters voluntary agreement with FCA, LNB News 02/10/2014 215
Wonga will have to make immediate changes to its business after it entered into a voluntary requirement with the FCA. Wonga will introduce new interim lending criteria aiming to improve customer outcomes, and will work to put in place a new permanent lending decision platform as soon as possible.
What is the background to the voluntary requirement?
The background is that the FCA took over regulation of consumer credit from the Office of Fair Trading (OFT) on 1 April 2014 and that signalled a change in approach by the regulator. The FCA is a lot more intrusive and interventionist than the OFT ever was and pretty much as soon as it took over it began to conduct a thematic review of payday lending companies. As part of that it focused, perhaps not surprisingly, on probably the highest profile lender in this market place, Wonga.
What did the FCA say about Wonga's actions leading up to the agreement?
Clive Adamson, director of supervision at the FCA, said:
'We are determined to drive up standards in the consumer credit market and it is disappointing that some firms still have a way to go to meet our expectations. This should put the rest of the industry on notice--they need to lend affordably and responsibly.'
I think they were expressing disappointment around progress made by some firms in this area and they've used the process in relation to Wonga in part it seems as a warning to the rest of the industry.
In advance of all this there had been a lot of speculation as to how the FCA would be different from the OFT in terms of the consumer credit market. I think a lot of people expected them to be a more aggressive regulator and that appears to be how it is turning out.
Why is this matter particularly noteworthy?
First of all it's a high profile, eye-catching, attention-grabbing case. Everyone's heard of Wonga and seen their adverts on the television and that seems consistent with the FCA's approach. They seem to like to go after the high profile companies in any industry, not just payday lending firms. I think they see that as having a deterrent effect--it grabs headlines and people hear about it and hopefully others will then not behave in the same way.
Secondly, this isn't the first voluntary imposition of requirements on Wonga. This is just the latest one and relates to affordability, but it is almost a copycat process to what occurred in June when Wonga requested a similar requirement to be applied to it in relation to its debt collection practices.
I think it's interesting they've gone after Wonga twice and on each occasion used the same method--a voluntary imposition of a requirement.
It's also interesting that they're not fining Wonga, instead they have required Wonga to enter into a redress programme basically to put right any harm caused to consumers.
Whether the FCA will look to impose a fine at a later date, this is presumably still an option for the FCA since there are references in these notices that there is the possibility of further action in the future.
The use of a section 166 skilled person to oversee Wonga's attempts to put things right towards consumers in terms of affordability also illustrates the growing trend by the FCA to use independent experts to do their investigative work for them.
Should firms be concerned about the outcome in this case?
I think so because essentially this case is about affordability and basically the FCA has applied pressure on Wonga to fundamentally alter its business model through the introduction of new interim lending criteria.
For a lender, their lending criteria are purely a commercial matter. Traditionally such decisions are totally within the control of the business itself. It seems that the FCA has applied pressure for them to fundamentally change their business model. That is worrying. It seems like the FCA is playing a part in how businesses operate and this is quite an unusual thing for regulators to do historically.
Another cause for concern is how quickly all this seems to have happened. The FCA has only been the regulator of consumer credit since 1 April 2014 and six months later it has already taken two significant pieces of action against the highest profile payday loan company in the UK. So the warning is, if the FCA is unhappy with the way a firm is operating things can change pretty much overnight for them.
What should lawyers advise their clients?
The way I look at this is that the FCA is indirectly requiring Wonga to alter its core business model. Essentially if you require a payday loans company to alter its lending criteria that might result in that company being a fundamentally different proposition from what it started out as. Will it still be profitable? Will it still be a viable business model?
One message is that businesses are under threat if they don't comply with the FCA's expectations in this area.
I think another piece of advice, particularly to other payday loans companies that are new to regulation by the FCA, is that they should be aware that the FCA is much more aggressive and intrusive than the OFT ever was.
It is going to pay for firms to comply with the FCA or a company may end up not making any money out of the business that it has written after having to pay redress to customers and/or fines. If the FCA regards a firm as having written business on an inappropriate basis, for example in accordance with improper lending criteria, as you can see with the Wonga decision this may require for customers to be repaid through a highly expensive redress exercise. We also shouldn't underestimate the management time that is lost to this kind of thing or the negative reputation connotations.
Interviewed by Fran Benson.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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