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With the Fall of Wonga, a New Era for High-Cost Credit

Many recent events have the United Kingdom's Financial Conduct Authority (FCA) calling for the consumer credit sector, but one case in particular has regulators and civilians alike showing more scrutiny.

The fall of the payday lender Wonga has shone a light on the industry, which is known for its predatory loans and high interest rates.

The FCA's New Approach

In a speech given to the Credit Summit in London, Jonathan Davidson, the Executive Director of Supervision for the FCA, made clear the bureau's intentions for the next year. He said that the focus of the regulative body will be do emphasize affordability of loans in the high-cost credit sector as well as hone in their practice of relending.

Financial Conduct AuthorityIn addition to stating that business models are a key component of the industry they wish to change, Davidson said that the FCA will be cracking down on rent-to-own companies and automotive financers in particular. He also said that affordability of loans was the main reason that the payday loan company Wonga fell into administration.

The Fall of Wonga

Not only were Wonga's loans expensive, it had a company culture of predatory lending focused on selling loans quickly, with minimum compliance to the UK's laws and regulations. The FCA has said that changing the company culture of businesses in the high-cost credit industry is key to making real adjustments to the sector as a whole.

Their argument is that not only are affordable loans better for consumers, it is that they lead to a sustainable business model for credit companies. The FCA plans on working closely with these businesses to show them that affordability is the key to long-term success. While some people may be skeptical about the government agency and high-cost credit companies working together, the FCA says it is to alter the business models of relending and enable the consumer to escape the vicious cycle of loans.

According to the experts at the site MoneyPug, which is used to find the best personal loans, the business model for many high-cost credit businesses is based on relending. This means that the goal is to trap a borrower in a loan with high interest rates and fees so they have to renew the loan or take out an additional one to pay off their debt. Not only is this immoral behavior, it isn't actually good for the company. Like Wonga, these companies focused on short-term gains in the next quarter. The business model is simply not sustainable.

The Future of the Industry

So what will happen to the largest sector the FCA supervises? They will be more heavily scrutinized by regulators who work towards augmenting company culture and the business model of relending. Wonga, once the largest provider of the high-interest short-term loans, is now dealing with citizens asking for compensation. This has affected other companies, who have stopped trading due to this onslaught of claims. Since the model of Wonga depended upon worsening the financial position of people in debt, the goal is to make companies more reputable.

While it is a waiting game for borrowers who wish to claim compensation from Wonga, other victims of the industry will go unpaid. Instead of compensating the other people who have borrowed from high-cost lenders, the FCA will try to make loans more affordable for borrowers. This may lead to more people taking them out, but it will be easier to get out of the cycle of loans. As they become more affordable, it is difficult to say whether high-cost credit companies will go back to their old ways when they have the ability to get more money from trapping customers in the debt of relending.

Loan volumes have already been increasing, but making the business models more sustainable will probably make loans go down. Many people are cynical about whether or not the industry will change, but it is clear that the FCA is working on altering the company culture of the industry and the business models of specific companies. Since borrowers repay 1.65 times the amount they borrow, only time will tell if this number goes down.

With the fall of high-cost credit company Wonga, awareness has increased about the industry's practices. Education is by far the most important thing for consumers to avoid being taken advantage of. When credit borrowers know what they are getting into, they are much less likely to take out a high-cost credit loan.

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