Beyond Wonga: Economists call for changes to British finance as payday lender hits buffers

Ben Wray

Wonga stops issuing new loans as company teeters on the edge of administration

LEADING economists are calling to changes in the structure of UK finance as the exploitative ‘payday’ loans company Wonga stops issuing new loans, as it sits on the verge of bankruptcy.

Wonga has been the subject of an escalating number of claims by customers relating to former loans. The company has lined up an administrator and shareholders have thrown £10m at the company to try to keep it afloat.

But economists warn that deeper changes in the way the UK’s dominant financial services industry operates will be necessary to end escalating private debt and impoverishment.

Speaking to CommonSpace, head of policy at the Common Weal leftwing think tank Dr Craig Dalzell said: “The world of fast finance and even faster credit has shown itself to be unsustainable and deeply detrimental to society. Too many lives have been ruined by debt spirals initiated by predatory lenders. If Wonga collapses, as seems likely, few shall mourn its passing.

“But now presents an opportunity to build something better. Common Weal believes that the future of finance lies in a network of publicly owned retail, savings and development banks staffed with responsible credit providers who are embedded in their communities. Providers who understand their clients needs and abilities as well as those of the economy around them.

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“Whilst we’re building this, we also need to consider the reasons for the rise of Wonga’s kind of credit-via-mobile-app in the first place. Insecure work, zero-hours contracts, low pay and far too many people living only a broken boiler or unexpected bill away from financial hardship. These things will require a hard look at nearly every aspect of how our economy is designed and managed. It certainly requires a shift away from measuring the success of our economy by metrics such as “GDP growth” and “consumer spending” and more towards metrics such as inequality, well-being and environmental sustainability.”

Wonga has admitted its bad practice in the past, writing off £220m in debt in 2014. The company offered customers loans with sharp rises in interest rates, leaving many without any capacity for repayment without taking out further loans, locking them into a cycle of debt. The FCA introduced stricter rules on loans in the same year, but now Wonga and similar payday loan companies are being hit with increasing volumes of claims from customers prior to the 2014 changes.

The FCA changes ruled against so called “roll-over” loans with interest payments sometimes reaching several times the initial value of the loans.

Between just April and July this year the Financial Services Ombudsman received 10,979 new complaints about payday loans, showing the massive spread of the high interest loans throughout the UK.

Writing on his Tax Research blog, Professor of practice in international political economy at City University of London Richard Murphy, who was previously involved in the campaign to cap interest rates on loans, welcomed the demise of Wonga, but said a state and local authority led social fund for emergency credit was required.

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He said: “The departure of exploitative lenders is good news.

“The need for a social fund, run by local authorities, or centrally funded but with local administration, that those with a need for emergency credit can turn to, remains as pressing as ever. That creation of such a fund would be the right response to this news.”

UK private debt has spiralled out of control in recent years as a consequence both of the financialisation of the economy and of government policies which shifted debt from collapsing banks to the state in 2008, and then from the state to the public through the imposition of austerity measures. In 2017 the average UK household spent £900 more than they earned, many making up for falling wages with increased debt.

Picture courtesy of worldoflard

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