Originally posted on https://www.talk-business.co.uk/2019/04/09/the-fall-of-wonga-the-future-of-high-cost-credit/

Recently high-cost credit lenders have been under fire, and some have been falling apart. Not only did the payday loan company Wonga just collapse into administration, the Financial Conduct Authority (FCA) has blamed it on their predatory, risk-driven lending. Formerly the largest provider of high-cost loans, now Wonga is having to pay for their unsustainable business model.

But Wonga aren’t the only ones. Legislators are pressuring the FCA to do better at monitoring credit companies, enforcing regulations, and creating new initiatives to promote sustainable and fair business models that aren’t based on relending.

Affordability & relending

Wonga fell into administration because their loans were not affordable. Not only does this lead to companies failing, it traps consumers in the cycle of debt and loans. When a loan has high interest and is therefore too expensive for the client to return quickly, they are forced to renew their loan or take out another one.

The culture is a large part of why a business makes their loans unreasonably expensive. The relentlessness of profit-driven credit makes it so that high-cost lenders do anything to increase profit margins. What the FCA will be doing to change this is making an effort to cultivate company cultures that go beyond compliance. It is proven that it is not only better for the consumer, it creates sustainable business models that will last into the future without relying on keeping their clients in debt.

How people will benefit

The claims filed by borrowers from Wonga won’t be compensated immediately due to the company’s financial position. These people will need to wait until the process comes to an end to get repaid, but citizens will benefit from these changes in other ways. For example, they will see the advantages of lower cost loans regulated by the FCA. It is also the agency’s position to educate the public, meaning people will understand what they are getting into with payday and short-term loans.

The specialists at MoneyPug, a site commonly used to find a reasonable payday loan, say that the FCA is making frequent financings to people who can’t afford the repayments one of their main issues. This will also make platforms to find the best payday loan opportunities increasingly enticing.

How companies will be affected

A few ways that high-cost credit companies will be affected are that they will be asked to change their business models and take lower profits. The FCA’s initiative introduced April 1st capping the process on rent-to-own companies will save consumers £22.7 million every year. Motor finance companies will also be scrutinized, with the FCA aiming to change the way the field operates.

Last year, the agency published their Approach to Supervision, which outline the ways in which the agency wants to be pre-emptive in their way of dealing with firms. Being proactive is a new way the FCA will regulate business. This also includes separating them based on size and dealing with the similar sized companies a certain way. While some people are suspicious about the government and credit companies working together, the goal seems to make credit loans more affordable, which is both a good and a bad thing. Public education will need to be a significant component of this initiative if the companies are to be held accountable. Up until now these firms have always looked for loopholes and new ways to make more money.

What will happen next

Now lenders await new regulations and enforcements. The FCA has said that they will write to high-cost credit firms in earl 2021 for an update on the supervision plans. It will also include an assessment on the impact of government interventions. According to the agency, they have already saved credit consumers £80 million in fees since tightening enforcements and exhibiting more scrutiny.

But the real work will be in years to come. As the FCA has stated, it is a problem with company culture and education. These are things that cannot be changed quickly. Slowly the agency will have to adjust the mindset of the industry and the willingness of consumers to take out high-interest short-term loans.

Still, with closer scrutiny, caps on costs, regulation enforcements, and intimate pre-emptive initiatives, the future of high-cost credit could become more reasonable. The only question is after establish sustainable business models and affordable credit loans, will companies slip back into their old ways? Or will they see the sustainability in cutting down on relending and making their loans more reasonable for consumers?