A probe by the Office of Fair Trading (OFT) found Wonga had sent letters to customers in arrears from non-existent law firms threatening legal action.
In some instances, Wonga also added charges to customers’ accounts to cover the administration fees associated with sending the letters.
Clive Adamson, director of supervision at the FCA which took the investigation forward, said: “Wonga’s misconduct was very serious because it had the effect of exacerbating an already difficult situation for customers in arrears.
“We are pleased that Wonga has been working with us to put matters right for its customers and to ensure that these historical practices are truly a thing of the past.
Adamson said the regulator expects firms to pay ‘particular’ attention to the fair treatment of borrowers struggling to keep up with repayments.
The failings, which took place between October 2008 and November 2010, saw Wonga, and other companies within its group, use unfair debt collection practices.
The tactics put customers under great pressure to make loan repayments that many could not afford.
During this time, Wonga sent communications to customers in arrears under the names “Chainey, D’Amato & Shannon” and “Barker and Lowe Legal Recoveries”.
This led customers to believe that their outstanding debt had been passed to a law firm or other third party. Further legal action was threatened if the debt was not repaid.
Neither Chainey D’Amato & Shannon nor Barker & Lowe existed and Wonga was using this tactic to maximise collections by piling the pressure on customers.
Wonga is the UK’s biggest payday lender. In 2012 it advanced almost four million loans to over one million customers.
Under the agreement with the FCA the short-term lender must identify and pay redress to all affected customers. While some customers will receive cash, others will likely have their outstanding balance reduced.
The process will start by mid-July with compensation likely to be paid from the end of July.