The news that Wonga has gone into administration is probably not a surprise, and little of the commentary so far has mourned its demise. Yet Wonga's path since the heady days when its adverts seemed ubiquitous starkly highlights the critical role regulation plays in financial services, as well as some of the unintended consequences in a story that probably has a good deal further to run.
The shift of regulatory responsibility from the Office of Fair Trading to the FCA in March 2014 was always going to be momentous. Going purely by the numbers, the FCA would be devoting c.£40mn to regulating the sector, about quadruple what the OFT had been able to spend. But the FCA would also have more powers than its predecessor, and access to a wider range of expertise, including a large Enforcement function.
And Wonga and the other payday lenders were always going to be top of the in tray. As post crisis austerity took effect, demand was high and so was political and media attention. It still is, as Stella Creasy's article shows (see link).
The FCA wasn’t originally keen on capping the interest rates payday lenders could charge, but under severe political pressure (led by Stella Creasy) it made virtue of a necessity. In parallel, however, Enforcement action was starting to kick in, and so Wonga’s revenue was being hit from two sides. This pressure was added to by both a stricter policy framework, and by the compensation claims that started pouring in.
All this was predictable, but as each of the four levers worked largely independently of each other, the overall impact was difficult to gauge. Less predictable was the impact of claims management companies (CMCs), spotting a lucrative side-line to their PPI business. This altered the volume and profile of compensation claims and made it difficult to plan for a future without a continuing overhang of liability.
However, certainly for a long time, the FCA’s approach has been predicated on Wonga’s continuing in business, offering loans and being able to pay out on claims. So the administration of the largest of the payday lenders presents regulators with a significant immediate headache, as well as posing wider questions for regulation. In no special order, here are five to start with:
1. What is the regulatory future of the high cost short term credit (HCST) market? What does good look like?
2. Is the interest rate cap for payday lending appropriately designed? If so, given the waterbed nature of the consumer credit market, should it apply to other HCST products?
3. How, if at all, should Wonga going into administration affect the regulation of other pay day lenders?
4. What realistic options do vulnerable consumers at this end of the financial services market have? And what does this mean for the FCA's Mission?
5. How should the FCA go about regulating CMCs?
All this of course takes place against a landscape dominated by Brexit, and no one should underestimate the senior management time these and other consumer credit-related questions will consume.
All of this is hard, and this balancing of competing priorities is one of regulation's biggest challenges. Meanwhile, the continuing fall in the value of real incomes and the related high levels of household debt mean HCST lending will jostle with Brexit at the top of regulators', and politicians' inboxes for the foreseeable future.
Six years ago, it was only a notion that capping would help protect the public from these companies. Now, we have clear and independent evidence that it does. Yet while the numbers have changed, the mindset has not.