• Revenues declined to £217.2m (2013: £314.7m), driven by a significant reduction in UK consumer lending, partially offset by growth in international lending, including BillPay.
• Operating costs increased 12% to £150.2m (2013: £133.7m) on higher staff numbers and one-off costs associated with application for regulatory authorisation in the UK.
• Software related impairment of £15.3m following a decision to move to a new third party lending platform and a new risk decision engine.
• Remediation costs of £35m, following agreement with the Financial Conduct Authority (FCA) of a major customer forbearance programme in the UK.
• Pre-tax loss of £37.3m (2013: pre-tax profit of £39.7m); post-tax loss of £42.8m (2013: post-tax profit of £30.6m).
• UK principal default rate down from 6.9% to 6.6%, reflecting strengthened lending criteria.
• Established a new leadership team with strong financial services experience.
• Implemented a new risk decision engine and tightened our lending criteria to ensure all lending is responsible and affordable.
• Launched a cap-compliant product to address the total cost of credit, in line with new regulations introduced across the industry.
• Suspended UK advertising as part of global marketing review to reduce the risk of inadvertently attracting the very young or vulnerable.
• Following discussions with the FCA, delivered a major forbearance programme for customers in arrears.
• Post the year-end, announced a major restructuring and cost reduction programme, and applied to the FCA for regulatory authorisation in the UK.
Andy Haste, Executive Chairman of Wonga, said:
“On joining Wonga last July, I set out six priorities to deliver essential change and this period has been focused on delivering against those priorities. We said Wonga would be smaller and less profitable in the near term as we focus on creating a sustainable business that lends responsibly and transparently to customers who can afford to borrow from us. Today’s results are clear evidence of the changes we have made and are continuing to make. We know it will take time to repair our reputation and gain an accepted place in the financial services industry, but we’re determined to deliver on our plans and serve our customers in the right way.”
Paul Miles, Chief Financial Officer, said:
“These numbers reflect the tough but necessary changes the business has made. Last year was focused on addressing the problems of the past and this will continue in 2015. We have the financial resources to invest in our people, systems and products, while significantly reducing our cost base to create a sustainable business for the long term. However, our 2015 results will reflect what will be another tough year.
“In parallel with executing our restructure, and as we build a sustainable and successful business, we will look to launch new products and may seek debt funding in 2016 to support the growth of the loan book.”
Key financial results
|UK principal default rate||6.9%||6.6%||-4.3% (improvement)|
I took the decision to join Wonga in July last year because I believe there is a real need and demand for short-term credit. Having worked in the financial services industry for more than 30 years, it is clear to me that there is an important role in society for such credit providers, but only if they put their customers first and lend responsibly.
Regrettably, that has not always been the case at Wonga. The new management team is tackling deep-rooted issues, the complexity of which became more evident as we were able to assess those issues and put measures in place to effect change. There was an urgent need to develop a clear strategy to drive sustainable growth as a regulated financial services business and to reduce the almost exclusive reliance on one product at one price. In doing this work, it was also clear that we needed to achieve a much deeper understanding of who our customers are, to replace our technology and to significantly reduce our cost base.
The focus now is on creating a sustainable business that lends responsibly and transparently to customers who can afford to borrow from us. We recognise this vision will take time to deliver, but the results we are reporting today underline the scale of the change already taking place. In particular, we have made significant progress against the six priorities I set out last summer:
1. We have conducted a review of Wonga’s customer base and products to ensure the Group is lending only to customers who can reasonably afford to repay their loans. The work to achieve a deeper understanding of who our customers are identified a significant group of cash and credit constrained individuals across the UK who we will look to serve in the future.
2. We have strengthened our affordability criteria and improved our processes to ensure all lending is conducted in a responsible and transparent manner and delivers fair outcomes for our customers. Following discussions with the FCA, we also announced a major forbearance programme in October 2014 for customers in arrears whose loans would not have been made had they been subject to the new affordability criteria.
3. We launched a cap-compliant product, a month ahead of the January 2015 deadline, to start addressing the total cost of credit and ensure greater transparency. These changes were in line with the new regulations introduced across the industry, but we also took the opportunity to improve our arrears process to better support customers who fall behind with repayments. This included the introduction of a three-day ‘grace period’ before applying any default fee and halving the maximum time that post-due interest can accrue to 30 days.
4. We have reviewed the way we present ourselves to the public, carrying out a major piece of work to better understand our customers and their needs, while suspending all advertising in the UK. We have also agreed with Newcastle United to remove the Wonga logo from all children's replica shirts from the 2016/17 season. In re-launching our advertising in the UK later this year we will ensure it addresses the right type of customers and reduces the risk of inadvertently attracting the very young or vulnerable.
5. Putting good governance at the heart of everything Wonga does has been an important focus for the new management team. Wonga remains a young company and one that had grown too quickly, and it was clear our processes, systems and governance hadn’t always kept pace with that growth. The pursuit of growth became the driving force in the business and there were times when loan outcomes were put before customer outcomes. We have taken steps to put that right: hiring a new senior management team with strong financial services experience; setting up a new Board of Directors for the UK business; launching a restructuring programme to reduce costs and ensure we have the right skills in place for a regulated lending business; and replacing our technology to ensure better outcomes for customers.
6. We are engaging positively with our regulators and other key stakeholders to put right the mistakes of the past and to ensure a strong culture with the right processes in place to deliver fair outcomes for customers and other stakeholders. In 2014 we agreed with the FCA to compensate customers affected by historical debt collection practices (the cost of which was accounted for in the 2013 results) as well as the major forbearance programme noted above. Following the 2014 year-end, we also applied to the FCA for regulatory authorisation in the UK, a process that can take up to 12 months.
While we have made significant progress, there is still much to do. As well as evolving our culture and addressing our cost base, we plan to broaden our product offering. We have a core customer base that continues to use Wonga and values the service we provide but our research shows that, in total, there is a wider audience of around 13 million people across the UK who are cash and credit constrained and who are significantly underserved by mainstream financial services.
We believe these consumers will be better served by a reformed, sustainable Wonga offering a broader product range to meet their needs. We and our investors are determined to deliver that.
Our focus has been on facing into the issues in our UK business and preparing for regulatory authorisation. That focus will continue in 2015 and we will keep working to ensure our growing international operations meet the same standards we are implementing in the UK.
We know it will take time for us to repair our reputation and gain an accepted place in financial services, but we are making the necessary changes to ensure we are serving our customers in the right way. I would like to thank all of my colleagues and our investors, who share this commitment, for their continued support as we work to build a sustainable business for the future.
Chief Financial Officer’s statement
We said last July that Wonga would be smaller and less profitable in the near term and today’s results reflect the necessary changes we are making, with a 31% decline in revenues to £217m in 2014, from £314m in 2013.
That decline was driven principally by the sharp slowdown in our UK consumer lending business, where lending volumes have fallen by 36% to £732m, from £1.1bn in 2013.
That has been driven by our work to tighten our lending criteria to ensure all lending is responsible and affordable. As a result we made 2.5 million loans in the UK last year against 3.7 million in 2013; the number of customers we serve has fallen from around 1 million to fewer than 600,000 in the UK; and our UK principal default rate has improved from 6.9% to 6.6%.
We would expect a further reduction in UK volumes in 2015, the first full year in which we will be operating under our strengthened affordability criteria.
At a Group level our lending volumes are down 1.5% to £1.28bn (2013: £1.3bn), with the UK slowdown partially offset by growth in our international businesses, including BillPay.
The £37.3m full-year pre-tax loss we are reporting reflects the steps we have already taken to change the business, whether in tightening our lending criteria, overhauling systems and processes, or putting customers right where we have failed to live up to expectations in the past.
But there is much more to do. For example, staff costs in 2014 were up significantly following an increase in the average number of employees to 830, from 550 in 2013. That is not sustainable given our evolving business and market and, in February this year, we announced a major restructuring programme that regrettably involved tough but necessary decisions about the size of our workforce.
We have also taken important decisions to ensure our technology and systems are serving our customers effectively. We have moved to a new third party decision engine, which determines the outcome of consumer loan applications, and are planning to move onto a new third party lending platform, which records and processes all of our transactions, during 2015. Included in today’s results is a £15m impairment on our existing software assets.
2014 was focused on addressing the problems of the past and that process will continue through 2015. However, we are also working to lay the foundations for a sustainable business for the future. Our investors have never taken a dividend from the business, leaving us with a strong balance sheet, including £124.8m (2013: £109.2m) of cash and cash equivalents. That gives us the necessary resources to continue investing in our systems, processes and people this year, strengthening the business for the benefit of our customers. However, our 2015 results will reflect what will be another tough year.
In parallel with executing our restructure, and as we build a sustainable and successful business, we will look to launch new products and may seek debt funding in 2016 to support the growth of the loan book.