PAYDAY lender Wonga must pay £2.6m compensation after chasing struggling customers with fake legal letters in order to pressurise them into paying up.
The firm, which is the UK's biggest payday lender, sent correspondence to about 45,000 customers in arrears from non-existent law firms threatening legal action, the Financial Conduct Authority (FCA) said.
The FCA could not impose a fine on Wonga for what it described as "unfair and misleading" debt collection practices, which happened between October 2008 and November 2010, because the failings were uncovered by a previous regulatory regime and it does not have powers to issue retrospective penalties.
The case, which consumer campaigners described as a "shocking new low" for the payday industry, also saw Wonga add charges to some customers' accounts to cover administration fees for sending the letters.
On top of these historic failings, Wonga has also uncovered another unrelated blunder, which it reported to the FCA in April this year.
This separate technical error resulted in just under 200,000 customers overpaying the company. Wonga is now also contacting these customers to offer compensation, and said the majority overpaid by less than £5.
It said that a greater number of people underpaid as a result of these technical errors, but it will not be seeking repayments from anyone who underpaid.
Wonga, which sponsors Newcastle United's shirts, has apologised and said all 45,000 customers who received correspondence from the fake law firms will be pro-actively contacted and offered a flat rate of £50 for distress and inconvenience.
Those who were charged fees for the letters will be refunded.
Customers are estimated to have paid £400,000 in charges for being referred to the fictitious law firms.
Wonga had contacted customers in arrears under the names Chainey, D'Amato & Shannon and Barker and Lowe Legal Recoveries, leading customers to believe that their debt had been passed to lawyers.
Further legal action was threatened if the debt was not repaid.
These firms did not exist and Wonga was using this tactic to pile the pressure on customers to pay up, the FCA said.
Martin Lewis, founder of MoneySavingExpert.com said: "This just shows that while Wonga hires expensive marketing, PR and public affairs consultants to try to position itself as 'the good guys in a bad industry', it's all a sham.
"Using lawyers as fake as its puppets, then having the stomach to charge people for it is a thuggish tactic, aimed at scaring and intimidating people who are already struggling."
Tim Weller, interim Wonga chief executive, said: "We would like to apologise unreservedly to anyone affected by the historical debt collection activity and for any distress caused as a result.
"The practice was unacceptable and we voluntarily ceased it nearly four years ago."
"We will learn from these mistakes and continue working with the FCA to build a better Wonga for the benefit of our customers."