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London - UK short-term lender Wonga is writing off the debt of around 330 000 customers worth about £220m, after being forced to overhaul its lending practices by Britain's financial regulator.
The Financial Conduct Authority (FCA) said on Thursday that Wonga had entered into a so-called voluntary requirement agreement to make the changes, which ensures immediate redress for consumers while allowing the regulator to continue investigations and possible enforcement action.
It is the starkest intervention to date by the regulator as it clamps down on practices by companies who charge high interest rates for short periods, dubbed "payday" lenders. Privately owned Wonga is the biggest such lender in Britain.
"Wonga has taken advantage of people in dire financial circumstances. Sadly, it comes as no surprise to learn that Wonga knowingly lent money to people who will never be able to afford to repay a loan and it is morally right that they have been forced to write off these loans," said John Mann, a UK lawmaker who sits on parliament's Treasury Select Committee.
Mann said Wonga's senior management should appear before the influential Treasury Committee and explain their lending practices.
It will write off all the debt of the 330 000 customers who are in arrears for 30 days or more. A further 45 000 customers who are in arrears of up to 29 days will not be charged interest and will be given longer to pay back their debt.
The bill for compensating customers will come to about £220m, people familiar with the matter said. That works out at an average of £666 for affected customers.
The company has already taken significant provisions for those loans not being repaid, and so will take a hit of about £35m in its 2014 results as a result of the write-off, one of the sources said.
The latest in a series of blows to the company will raise questions about its future, however.
Its profits more than halved last year to £39.7m after it had to set aside £18.8m to cover legal fees and fines from regulators arising from a scandal in which it sent fake legal letters to some customers.
Hardship
Wonga launched in 2007 and grew rapidly, saying it filled a gap left by traditional lenders by providing flexible financing for thousands of people. It has 1 million customers in Britain, and another 3 million in eight other countries, including South Africa, Canada and Spain.
It is backed by technology investors including Accel Partners, Balderton Capital and Greylock Partners. Other investors include Dawn Capital, Meritech Capital and Oak Investment Partners. The investors either declined to comment, did not respond to requests or could not be reached.
Wonga has raised $145m in three equity fundraisings since 2007, mostly in 2011, to help it grow.
It and other short-term lenders have been lambasted by politicians and even the Church of England for charging high levels of interest rates - which at Wonga can equate to 5 853% a year - that cause hardship for many of its customers.
Regulators have started to take action to better protect the estimated 1.6 million customers who take out 10 million payday loans a year, worth £2.5bn.
The average loan is £260 and an increasing number of people are taking loans from multiple firms, according to an FCA industry survey.
The FCA, which took responsibility for short-term lenders six months ago, said in July it would cap fees on new payday loans from next year.
"The announcement today ... is a clear sign to the consumer credit industry that it must be prepared for a more interventionist and active regulator," said Michael Ruck, a lawyer at Pinsent Masons and formerly at the FCA.
Wonga said it was making significant changes to its lending criteria that will mean it accepts "significantly fewer" loan applications and will mean some existing customers would no longer be able to borrow from it.
Wonga's chairperson Andy Haste, who joined in July, vowed to reform strategy. "It's clear to me that the need for change at Wonga is real and urgent," he said on Thursday.
"We want to ensure we only lend to those who can reasonably afford the loan in question, and during my review it became clear to me that this has unfortunately not always been the case," he said.
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