Wonga profit hit by £18m letter row
Profits at payday lender Wonga more than halved last year after it racked up £18.8 million in costs relating to a scandal over fake legal letters.
The company expects it will be "smaller and less profitable" in the near term as it carries out the task of cleaning up its reputation in an industry which has never been far from controversy in recent years.
The profits figure for 2013 slumped by 53% to £39.7 million, even though it issued 4.6 million loans - a rise of 15% - and lent a total of £1.3 billion in the period. The default rate on loans fell to 7% from 7.4% in 2012.
Wonga, which has come under fire from MPs for charging annual interest rates of over 5,000%, was impacted by higher operating costs and the one-off charge to cover the historic debt collection and system issues.
In June, Wonga was ordered to pay compensation of £2.6 million by the Financial Conduct Authority (FCA) after sending threatening legal letters from fake law firms to 45,000 customers.
The FCA said Wonga had been guilty of "unfair and misleading debt collection practices" by creating fake companies to pressure struggling customers into paying their bills.
The regulator is bearing down on all providers of short-term credit, proposing in the summer a cap on payday lending meaning that from next January, interest and fees must not exceed 0.8% per day of the amount borrowed.
It also wants to impose a cap on the overall cost of a payday loan so that it cannot exceed 100% of the original sum borrowed. Payday lenders have been attacked by MPs as a form of "legal loan sharking".
Wonga recently appointed Andy Haste, the former chief executive of the RSA insurance group, as its new chairman in a bid to clean up its battered reputation.
At the time of his appointment in July, Mr Haste said: "This is a sector and Wonga is a company that needs to go through significant change if it is to have a sustainable future.
"Some serious mistakes have been made. The company admitted those mistakes and it has apologised for those mistakes."
Today's figures include a 56% rise in operating costs due to investment in staff, infrastructure and Wonga's international businesses.
Michael Ruck, a senior financial services enforcement lawyer at Pinsent Masons and formerly with the FCA, said: " Such a large drop in profits reflects both the impact of FCA regulation and also the current reputation of payday lenders.
"Firms are in the process of finding out if they have achieved FCA authorisation. Despite the large amount of time and money invested by firms, they need to understand the standards and approach of the FCA including how to challenge the FCA.
"Wonga and similar firms need to stop shooting themselves in the foot by doing things such as allegedly impersonating solicitors to recover monies from customers."