British lender Wonga, which offers high-interest short-term loans to people in dire need of cash, must pay £2.6 million in compensation after sending fake legal letters to pressure customers into repayments, regulators said Wednesday.
The company has agreed to pay the equivalent of $4.4 million or 3.2 million euros in compensation to 45,000 customers in Britain, the Financial Conduct Authority (FCA) regulator said in a statement.
Wonga is Britain's biggest 'payday' lender and offers short-term loans forcustomers who run out of money before their monthly pay cheque.
Its typical annual percentage rate stands at 5,853 percent, the company said on its website.
The privately-owned group only offers loans online, and also operates in Canada, Poland, Spain and South Africa.
Payday lenders flourished under Britain's economic downturn, but the industry has faced heavy criticism from politicians and regulators over punitive interest rates for vulnerable poor people with bad credit histories.
Following an investigation, the FCA said Wednesday that Wonga was found to have sent customers in arrears letters from non-existent law firms threatening legal action and in some cases charged fees for the correspondence.
The regulator added it had uncovered "unfair debt collection practices which put customers under great pressure to make loan repayments that many could not afford".
The failings took place between October 2008 and November 2010.
The group apologised "unreservedly" for the failings, and has pledged to "significantly" improve its business processes.
The FCA said Wonga had sent letters from fake law firms "Chainey, D'Amato & Shannon" and "Barker & Lowe Legal Recoveries".
The letters were aimed at making customers believe their outstanding debt had been passed to a law firm, with further legal action threatened if the debt was not repaid.
"In fact, neither Chainey, D'Amato & Shannon nor Barker & Lowe existed and Wonga was using this tactic to maximise collections by piling the pressure on customers," the FCA said.