Britain's biggest payday lender, Wonga, has been ordered to pay £2.6m in compensation to customers threatened with fake legal letters.
The Financial Conduct Authority (FCA) said 45,000 customers were hit by unfair and misleading debt collection practices which included customers in arrears being sent letters by 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, the FCA said.
The watchdog said the failings, which took place between October 2008 and November 2010, saw Wonga, and other companies within its group pile pressure on customers to make loan repayments that many could not afford.
It uncovered communications to customers in arrears under the names "Chainey, D'Amato & Shannon" and "Barker and Lowe Legal Recoveries", leading customers to believe that their outstanding debt had been passed to a law firm, or other third party.
The FCA said neither Chainey D'Amato & Shannon nor Barker & Lowe existed.
Clive Adamson, director of supervision at the FCA, 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.
The company, which made nearly four million loans to over one million customers, has been ordered to pay compensation to each customer affected by the failures.
The FCA said the compensation could result in some borrowers' outstanding debts being cut rather than a cash payment being made.
Tim Weller, interim Wonga CEO following the departure of its founder Errol Damelin earlier this year, 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."
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