Troubled payday lender Wonga has been forced to write off an estimated £220m-worth of debt after the City Watchdog accused it of irresponsible lending.
The Financial Conduct Authority has taken the unprecedented step of making the short-term lender cancel the outstanding debt of 330,000 borrowers and scrap the fees and charges of 45,000 more.
It has also required Wonga to set up a new permanent lending decision platform and appoint a expert to monitor it who will report directly to the regulator.
It's the second major blow to the firm this week after it posted a 53 per cent slump in pre-tax profits on Tuesday.
The FCA acted today after it saw evidence about Wonga’s relending rates which suggested the lender was not assessing customers’ ability to meet repayments in a sustainable manner.
As a result it has told the high-cost credit provider to introduce new affordability checks and write off debts for 330,000 customers who are currently in 30 days arrears or more.
Another 45,000 customers who are up to 29 days in arrears will not have to pay interest or charges on their loans. They will also be given the option of paying off their debt over an extended period of four months.
Clive Adamson, director of supervision at the Financial Conduct Authority, 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."
In July, three months after stringent new credit rules were introduced, the payday lender appointed former RSA boss Andy Haste as chairman to turn its fortunes around. He said today: “It’s clear to me that the need for change at Wonga is real and urgent. Our regulator is determined to improve standards in consumer credit and I share that determination. There is much to do in order to make Wonga a sustainable and accepted business."
Michael Ruck, financial services enforcement lawyer at Pinsent Masons and formerly with the FCA said: “The announcement is a clear sign to the consumer credit industry that it must be prepared for a more interventionist and active regulator."
"More stringent controls and putting the customer at the heart of business are foundations for those firms within the FCA regulated world. Should firms fail to meet these standards the costs of remediation and changes to business practices will have a significant impact upon the profitability of those in the consumer credit industry.”
Mr Haste has already admitted that Wonga will become a smaller and less-profitable company and today the firm said it would be accepting significantly fewer loan applications and that some existing customers would no longer be able to use the service because of tighter lending.
It must contact all customers by 10 October to notify them if they will be included in the redress programme. Borrowers should continue to make payments unless they are told to stop by the firm. Borrowers who are experiencing financial difficulty, should contact Wonga to discuss their options.