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Wonga condemned as “immoral and unjust” by church leader

By Kenny Kemp

Published: Sunday Herald

Date: May 29th, 2011

A Church of Scotland leader has branded the new Heart of Midlothian strip sponsor, Wonga.com, as “immoral”. The London-based finance firm, founded by South African-born entrepreneur Errol Damelin in 2006, has already been labelled as “ethically bankrupt” and usurious by the Harvard Business Review. The firm lends short-term money at annual compound interest rates of 4,000% plus.

The payday loan sector, whose participants prey on the cash-strapped, is one of the fastest growing in the UK financial services market, as millions of Britons contend with pay restraint, 4.5% CPI inflation and cut-backs in working hours. The sector, which also  includes pawnbroking, is valued at £7.5 billion according to the Office of Fair Trading.

Internet companies such as Wonga and Payday UK use aggressive marketing techniques to reach a wider market, with Wonga already sponsoring English Premier League football club Blackpool.

The Reverend Ian Galloway, convenor of the Church of Scotland’s church and society council, who will unveil a major report on the sector to the General Assembly of the Church of Scotland this Tuesday, is deeply concerned about the trend.

“Clearly, within the regulations of financial services, it is technically legal but being technically legal doesn’t make it moral. Wonga and others like them perpetuate poverty by giving loans with colossal interest rates that trap the poorest people in debt, which is both immoral and unjust. A significant number of people in Scotland have rising debt problems. There is the potential for this to get much worse when people are paying such high rates of interest.”

Hearts FC spokesman Paul Kiddie referred journalists to a press release dated April 27 that quoted Hearts’ managing director David Southern as saying he was “delighted” with the club’s two-year sponsorship deal with Wonga. The club and Wonga are jointly exploring further opportunities, including putting Wonga branding on football shirts sold to children. The sponsorship deal announced last month was also trumpeted on the Scottish Premier League website.

According to Wonga, a £301 loan for 28 days costs £90.14 in interest and fees. This represents an annual rate of interest of 360% but an APR representative rate of 4,214%, which is a daily compounded figure over a year. A company such as Payday UK charges £25 per £100 borrowed for a month, or £175 to get £700 for the same period, an annual interest of rate of 300%, but an APR representative rate of a more modest 1,737%. It takes about two minutes to apply for such loans on the internet.

The payday loans industry argue that  ‘APR representative’ is not a good way of assessing the true cost of short-term loans. The official Bank of England UK interest rate is currently 0.5%, with retail and supermarket banks currently charging rates of  6.9 to 10% for personal loans. Credit card interest ranges from 0% to up to 40%, with the average around 19%. For example, Barclays is offering a 0% card for 20 months, followed by a 17.5% APR.

A Wonga spokeswoman said:

“We sit outside the payday loans industry. This is a new product for a new generation of people looking for short-term loans. The APR representative rate is really irrelevant and misleading but we are expected to put it on the website. We don’t compound interest and we don’t make loans for a year. We’re crystal clear about all our costs and how we operate, so that everyone using Wonga is clear about what we’re doing.”

The spokeswoman blamed mainstream banks and the credit-card industry for stoking up the debt crisis by offering customers long-term loans at high rates of interest. She added:-

“Wonga offers a service which customers value, especially at a time when banks and credit card companies aren’t always keen to help. Wonga takes its responsibilities as a lender very seriously, screening those applying for a loan using our unique technology and only accepting around 30% of first-time applicants. A recent, and independent Populus survey, showed that 95% of our customers are satisfied and 96% believe Wonga is transparent about its service.”

Galloway echoed a call from the recently re-elected independent MSP Margo MacDonald to have the law changed in Scotland. MacDonald has urged Scotland’s finance minister John Swinney to give credit unions greater financial muscle in lending and to help people who are in serious debt. MacDonald said:

“There are 14 European countries where interest rates are set in stone by legislation. In France it is illegal to charges three times more than the average cost of borrowing. That would be a good solution for Scotland.”

Galloway would like to see the law in Scotland changed so the charging of usurious interest rates becomes illegal. However, under the current constitutional framework, the matter is reserved to the UK government in Westminster.

Galloway, minister for the Gorbals district of Glasgow, said poverty is one of the biggest issues faced by Scotland today and believes the Scottish government should be doing more to address it.

“Commercial companies making it easy within minutes to gain finance over the internet have very well developed marketing methods. It is very easy to take out a loan and quickly get into deeper debt. This is one of the miseries of modern life in Scotland. I think that as a society we should be deeply uncomfortable about the mainstream marketing and promotion of excessively high interest loans and the association of family activities such as watching football.

Payday loan companies are not regulated by the Financial Services Authority but come under the Consumer Credit Act and the Office of Fair Trading. An OFT report published in June 2010 found that people using high-cost credit have limited options and are often incapable of exercising choice to obtain the best deal. The report recommended that the UK government looked at the long-term impact and that it explored whether, under the European Consumer Credit Directive, there is scope to oblige high-cost credit suppliers to incorporate “wealth warning” statements into their advertising. But Westminster has as yet failed to act.

An edited version of this article was published in the Sunday Herald on May 29th, 2011

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2 Comments for “Wonga condemned as “immoral and unjust” by church leader”

  1. A loan of this nature is tailored to suit the desperate and the impulsive and these are precisely the people who are most likely to be caught out by them. Although the OFT report says that high cost loan providers receive very few complaints they also say that the majority of uptake for these loans is from the low earnings sector and from people who do not feel equiped to shop around. It is these people who are also unlikely to go through the rigorous process of any complaints procedure if there is discontent and far more likely to merely take any on the chin.

  2. […] Prozent auf. Nachdem nicht nur die britischen Medien, sondern auch führende Kirchenvertreter Wonga moralisch verurteilt hatten, zog das Unternehmen sein Studentenangebot […]

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