With payday lender Wonga entering administration, the Association of British Credit Unions (Abcul) has highlighted credit unions’ role in providing an alternative to high-cost creditors.
In spite of the payday lender’s collapse, customers will still make any outstanding payments in the normal way. Around 200,000 Wonga customers owe more than £400m in short-term loans.
In a statement published on 30 August, the FCA confirmed that all existing agreements remained in place and would not be affected by the administration. However, the firm is no longer able to issue new loans. The repayments will be overseen by administrators Grant Thornton.
Wonga was the UK’s biggest payday lender. In 2014 the FCA ordered the business to pay £2.6m to 45,000 customers for “unfair practices”. New payday loan regulations introduced in 2015 required all online lenders to advertise on at least one price comparison website. The FCA also imposed a cap on fees and charges on payday loans at double what was borrowed, which affected Wonga’s profits. In 2016, the payday lender reported pre-tax losses of nearly £65m.
Abcul’s head of policy and communication, Matt Bland, warned that the closure of Wonga should not be confused with the end of high-cost lending or payday lending.
He said: “The interest rate cap regime has caused most short-term lenders to adapt their lending practices and many now offer loans on instalment repayment plans which, while still very expensive, are much better for consumers. And while the FCA’s consumer credit regime had produced improvements in practices in many respects, lenders continue to grow and lend to people who find difficulty accessing credit from the mainstream.
“Credit unions offer an alternative to these high-cost creditors which puts people’s long-term financial resilience at its heart. They will lend people the smaller sums that banks won’t consider but at reasonable rates of interest. At the same time they encourage people to save, which is the only long-term route out of a cycle of debt. The Fairbanking Foundation’s Save As You Borrow report demonstrates the power of this method.
Stats published by the Bank of England last week showed that credit unions have two million members across the UK. Total assets reported also reached £3.2bn, 2% higher for the first quarter of 2018, compared to the same period last year.
Related: How credit unions make a difference
Mr Bland says Abcul is working closely with the government, regulators, banks and others to continue to support the sector expand.
“With changes to legislation and regulation, some targeted investment and partnerships with employers to deliver services in the workplace, credit unions could become and even more significant force in providing an ethical source of credit for people who face some financial challenges,” he added.
Writing for the Guardian, Labour/Co-op MP Stella Creasy, who has been leading a campaign against payday lenders, warned that Wonga’s demise would not lead to an end of “legal loan sharking”. She pointed out that the number of payday lenders had fallen but 150 such lenders continued to operate in the UK. She added that some lenders offer high cost credit cards while others ask for guarantors to chase more people for the same debt.
Actor and activist Michael Sheen also called on the government to ensure that Wonga would be sold to an ethical lender. In March 2918 Mr Sheen launched the End of High Cost Credit Alliance, which promotes affordable alternatives, such as credit unions. Speaking to the Observer, he added that the collapse of Wonga was an opportunity for the government to support “fair and responsible” credit providers.