Wonga to pay £2.6m after legal threat lies
45,000 WONGA customers who received letters from non-existent law firms will be paid £2.6 million in compensation, the Financial Conduct Authority (FCA) said today.
The letters, which were sent out between October 2008 and November 2010, threatened Wonga customers in arrears with legal action if their debts weren't repaid quickly.
Some customers were also charged administration fees for the letters.
Wonga, the UK's largest short term lender, has previously tried to distance itself from poor practice in the rest of the payday market.
Today, interim CEO Tim Weller's promise that the lender is "working hard to serve the demand for short term credit in the most responsible way possible" rings more hollow than ever before.
Wonga sent out letters purporting to be from two fake law firms 'Chainey, D'Amato & Shannon' and 'Barker & Lowe'.
Judging by online forums, many customers were quick to spot that these companies were clearly subsidiaries of 'Dewey, Cheatem & Howe'.
"I have received an email from Wonga's email address saying they are Barker & Lowe but when I Googled their number and name, nothing is found," one customer writing on the Money Saving Expert message board said.
"Just wondered if anyone had heard of them or whether my suspicions are right, that this is just Wonga's own made up company to try to scare people a little."
In response, another customer said they had also seen through Wonga's less than masterful deception.
"Have you tried ringing Barker & Lowe on their number? I just have lol and what a surprise the automated response was 'Thank you for calling Wonga.com, our offices are now closed'."
Suspicions were also raised on the Consumer Action Group forum where a Wonga customer who had worked "for a dodgy online company in the past (selling beer not loans)" pointed out that "simple online checks with Companies House and VIES" turned up nothing.
"[I] was immediately reassured to find [that] Barker & Lowe do not exist outside of Wonga's imagination," the poster added.
Elsewhere, however, Wonga customers clearly took the legal threats seriously.
Customers discussed agreeing repayment plans with the 'firms' and having their debts passed on to other, presumably real, collections firms.
Regulators knew in 2011
"Wonga's misconduct was very serious because it had the effect of exacerbating an already difficult situation for customers in arrears," Clive Adamson, the director of supervision at the FCA said today.
The FCA's tough stance is in stark contrast to that of the previous payday regulator the Office of Fair Trading (OFT).
The OFT found out about these abuses in 2011 after its own investigation into debt collection practices but didn't take any public action.
That same year, Which? referred two specific payday lenders to the OFT and, along with many other consumer groups, spoke out about poor practice in the market in general.
Still the OFT continued to rely on self-regulation.
In 2013, the Public Accounts Committee (PAC) said that the OFT's failure to identify risks of malpractice was costing consumers at least £450m a year.
Today's news is just one example of the much deeper consequences of their lax approach to regulation: distress for thousands of borrowers unfairly threatened with completely spurious legal action.
Who will get compensation?
Under their agreement with the FCA, Wonga must find and contact all the customers they sent these fake legal letters to.
Wonga will send out their first letters from the middle of next month and start paying compensation at the end of the month.
how it breaks down
Everyone charged fees: refunded
Case by case: extra compensation
The FCA estimate that about 45,000 people are due an apology.
Everyone that was contacted by a fake law firm through Wonga will get a flat £50 settlement for distress and inconvenience, that amounts to £2.25 of the £2.6 million.
Customers who were charged for their 'referral' to the fake firms will get that money back. The FCA think that these fees make up £400,000, so the other 15% of the total compensation.
Wonga may give some customers further compensation, depending on individual circumstances. That will push the total compensation amount about £2.6m.