Did Wonga send collection notices from fake law firms?

Payday lender Wonga is facing perhaps its toughest test yet as it fights to retain the right to sell high-cost payday loans. Amid allegations that the firm sent collection notices from law firms that did not actually exist, the firm find it difficult to continue operating in all of the same markets.

A ruling by Glasgow’s City Regulator resulted in a £2.6 million charge against Wonga. If you are one of the lucky recipients of this compensation, do not get too excited. With 45,000 other fellow plaintiffs, you can expect to receive no more than an average of £57.

While the payday lender charges oppressive interest rate that is only affordable to British royalty, that is not the current focus. At issue is an alleged practice of Wonga where it sent letters to debtors that defaulted on the firms loans. The lender reportedly listed the law offices of Barker & Lowe Legal Recoveries on some letters and Chainey, D’Amato & Shannon on others.

There is nothing illegal about a law firm sending a collection letter for a legitimate debt. However, no law firm sent those letters.

The two legal agencies do not exist. There is no Chainey, D’Amato & Shannon. It is a fake firm. The same is true of Barker & Lowe Legal Recoveries.

London Police are considering whether an investigation into Wonga’s debt collection practices should be opened. There is indeed a major focus on bringing action against the lender.

The obvious option is for the Financial Conduct Authority (FCA) to investigate the company. FCA is currently pondering whether to upgrade Wonga’s interim license to a permanent one. The latest revelations may throw a wrench in those plans.

FCA is already claiming it has no authority to apply retroactive sanctions against the company. This claim may be a questionable stance considering that other lenders will be following this case closely. The fake law firm practice reportedly ceased in 2010 after running for a couple of years.

The investigation by Glasgow’s city council confirmed that Wonga was perpetuating the fake law firm routine since 2008. While Glasgow took action, the FCA is balking at a solution. Wonga collection strategies may have been wonky, but for now it may still provide unaffordable loans to those who have no where else to turn.

Wonga’s Apology

Wonga provided a public response to the action in which it apologized for the “misleading impression” that the fake notices gave to its customers. It admitted blame in the indiscretion.

In an interesting twist, Wonga revealed that system errors were to blame for improper balance calculations. It stated that most mistakes were underpayments, but that some customers overpaid by an amount generally not exceeding £5. Wonga pledged to repay those overpayments plus interest. I wonder if interest on refunds will be at their stated interest rate of 365% APR or the representative rate of 5,853% APR. Closer to 12% is a more likely bet.