* Letters from non-existent law firms threatened legal
* Compensation to be paid to 45,000 customers
* "Shocking new low" for payday industry - consumer group
(Adds comments from Wonga, consumer group and Church of
By Steve Slater
LONDON, June 25 Britain's biggest payday lender
Wonga will pay 2.6 million pounds ($4.4 million) in compensation
to 45,000 customers after sending them bogus letters from
non-existent law firms that threatened legal action.
The short-term loan industry has come under increasing
scrutiny from politicians, regulators and even the Church of
England for high levels of interest rates that cause hardship
for many of its customers.
In some instances Wonga added charges to customers' accounts
to cover the administration fees of sending the bogus letters,
according to the findings of an investigation begun by Britain's
Office of Fair Trading and taken on by the Financial Conduct
The financial watchdog said the unfair practices between
October 2008 and November 2010 had put customers under great
pressure to make loan repayments that many could not afford.
"It's a shocking new low for the payday industry that is
already dogged by bad practice and Wonga deserves to have the
book thrown at it," said Richard Lloyd, executive director at
consumer group Which?.
The bogus letters were sent to customers under the names of
'Chainey, D'Amato and Shannon' and 'Barker and Lowe Legal
Recoveries', neither of which existed.
The FCA ordered Wonga to offer all 45,000 customers a flat
rate of 50 pounds for distress and inconvenience and to refund
those who had paid legal charges, estimated at 400,000 pounds.
The Archbishop of Canterbury Justin Welby has pledged to
drive Britain's payday lenders out of business by supporting
credit unions as an alternative. Former regulator Hector Sants
is leading a new financial taskforce set up by the Church as
part of its campaign.
"This highlights the need for more responsible alternatives
to payday lending and other forms of high cost credit," a Church
of England spokesperson said of the problems exposed at Wonga.
The FCA, which took over responsibility for consumer credit
in April, has been cracking down on the industry to tackle the
way cash-strapped consumers are treated when they struggle to
One in three high-cost, short-term loans goes unpaid or is
repaid late in Britain and the FCA wants lenders to help people
regain control over their debt and treat debtors with more
sympathy as part of a drive to change the culture in financial
services to focus on customers, rather than profit.
Wonga's interest rates can equate to as much as 5,853
percent a year, though its loans are only supposed to be held
for a short period of time, often to provide funds for someone
until they are paid. In 2012 it made nearly 4 million loans to
over one million customers.
Wonga's interim CEO Tim Weller on Wednesday said he
apologised "unreservedly" for the "unacceptable" practice. the
company also apologised for unrelated systems errors that
resulted in a miscalculation of some customers' balances.
The company's former chief executive, Niall Wass, last month
quit just seven months after taking on the role from the former
co-founder Errol Damelin. This month Damelin, who co-founded the
firm in 2006, quit as a director of the company.
Wonga made a 62.5 million pound profit in 2012, benefiting
from a surge in applications as household budgets were squeezed
and banks cut back on credit.
($1 = 0.5892 British Pounds)
(Reporting by Steve Slater and Kirstin Ridley; Editing by Jane
Merriman and Elaine Hardcastle)