The payday lender was found to have sent letters to customers in arrears from non-existent law firms, threatening legal action, according to the probe by the Office of Fair Trading (OFT) and taken forward by the Financial Conduct Authority FCA.

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, 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 FCA expects firms to pay particular attention to fair treatment of those who have difficulty in meeting their loan 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 which 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”, leading 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.

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.

Richard Lloyd, executive director of consumer group Which?, said:

“It’s right the Financial Conduct Authority is taking a tougher line on irresponsible lending and it doesn’t get much more irresponsible than this. It’s a shocking new low for the payday industry that is already dogged by bad practice and Wonga deserves to have the book thrown at it.

“The FCA must now also clamp down on excessive fees and charges, starting with default fees charged by some payday lenders, to show it is serious about getting a fairer deal for borrowers.”

Wonga is the UK’s biggest payday lender. In 2012 it made nearly four million loans to over one million customers.

Under the agreement with the FCA, the 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.