Wonga set to report annual loss as regulation bites

Wonga, the UK's largest payday lender, is being forced to overhaul its business in order to survive after a regulatory crackdown on the industry has sent it tumbling into the red.

The company is set to report on Tuesday its first annual loss of about £35m for last year, following the launch of tough regulation designed to clamp down on irresponsible lending practices.

The lender, which has come under criticism for charging annual percentage rates above 5,000 per cent, is expected to report a drop in revenues from £315m to £215m in 2014, as first reported on Sky News.

The loss comes after years of Wonga reaping profits, reaching £84.5m in 2012 on the back of extensive advertising and expansion into international markets.

However, Wonga's latest set of results show even the largest lenders are coming under strain, forcing them to evolve in order to survive.

Wonga has overhauled its management team following a string of high-profile departures, with three chief executives leaving the company within a year.

Andy Haste, the former chief executive of insurer RSA, took over as Wonga's executive chairman in July last year.

Yet experts believe Wonga and other lenders must now focus on improving underwriting standards and look to offer other types of loans.

John Lunn, a partner at business consultancy Moorhouse, said: "There is this gap that high street banks are unable to fulfil. The Wonga model has been based on short-term loans, high interest rates, and significant charges. It could look to the credit union model of longer-term loans, but to do that it needs to understand its clientbase."

The payday lending industry has come under pressure since the Financial Conduct Authority began regulating the sector last year.

The watchdog imposed rules which ensure that borrowers never have to pay more than double the amount of the original loan, while limiting the number of times lenders can extend loans for extra fees

A cap on the total cost that lenders can charge came into force at the start of this year, which the FCA's chief executive Martin Wheatley has stated could wipe out all but four or five of the UK's payday loan companies.

Payday lenders are undergoing an authorisation process with the watchdog in order to continue to operate.

Wonga recently revealed it is halving the size of its UK-focused workforce as part of a cost reduction programme designed to save £25m over the next two years.

Mr Haste said last year that Wonga could "no longer sustain its high cost base" which must be "significantly reduced" after previously warning that the lender would become "smaller and less profitable".

Wonga was also forced to pay compensation of £2.6m to thousands of customers last year after sending them debt collection letters from fictional law firms, and wrote off £220m of debt.

In addition, the lender has tightened criteria to improve credit checks and prevent customers who have already defaulted from taking out new loans.

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