Though some high-profile high-cost lenders have got themselves in trouble, there are still many alternative lenders who are returning millions to customers.
Since the payday loan industry first came onto the scene in the mid-2000s it has altered dramatically. In just 15 years we have seen the rise and fall of the high-cost payday loans sector. Following the financial crash in 2008, a recession in the UK as well as a public sector pay freeze in 2010, the banks stopped lending as much as before, which led to the proliferation of companies specialising in payday and other kinds of high-cost short-term credit. The sector grew dramatically. Before the crash in 2009, around 250,000 people yearly took out a short-term loan. By 2012, these firms lent over £2.2 billion in loans to 1.8 million people in the UK.
Since then many high-cost payday lenders have struggled with customers claiming refunds through claims management companies. We have seen the biggest payday lenders in the UK, Wonga, Quick Quid and The Money Shop, going into administration following a swarm of payday loans refunds taken out by ex-customers who were mis-sold high-cost loans. Amigo loans and Provident’s consumer credit division are both trying to set up schemes claiming they can’t afford to pay all the claims they are receiving.
The reason for these refunds is due to a regulatory clampdown initiated by the sector watchdog, the Financial Conduct Authority (FCA). In 2015, the FCA implemented several stricter rules to make sure there was better regulation of the market, to make it fairer for customers. New rules include a limitation on the number of times a payday loan could be rolled over, stronger rules on financial health warnings and affordability checks, and a price cap on high-cost short-term credit.
Customer’s increased awareness of being mis-sold loans due to the new regulations by the FCA in 2015 caused higher complaints numbers. In most cases, the regulator decided they shouldn’t have lent to the customer in the first place as the customer couldn’t afford it. Even if the borrower self declares expenses and income, lenders are expected to find ways of validating claims and make sure customers can pay interest and still afford basic living costs. This means lenders can still be found guilty of giving an unaffordable loan, even if the borrower lied on their application. On top of this, claims management companies like The Claims Guide make it easy to claim a refund from these lenders.
Though there have been some high-profile cases of lenders having to give millions of pounds to customers in the form of redress, to the point they become insolvent, there are many lenders that are still lending that will likely follow. One such lender is Lending Stream, owned by Gain Credit. In recent figures from the Financial Ombudsman, 76% of complaints were upheld, meaning customers can claim back all interest payments on their loans. If this is at all reflective of the number of past customers that can claim refunds, Lending Stream could end up paying millions back to customers. In the last two reported years of their private accounts (2019 and 2018), Lending Stream’s owner Gain Credit expensed a £13.5m reserve for the likely cost of these claims. However, with annual revenue of around £100m for the last few years, the actual number could end up being a lot higher if some of their peers are anything to go by.