Payday lender Wonga has been ordered to pay £2.6m in compensation after sending letters to customers in arrears from non-existent law firms.
The UK's biggest payday loan company entered an agreement with the Financial Conduct Authority to compensate around 45,000 customers.
An investigation by the Office of Fair Trading found Wonga had created fictional law firms to threaten legal action against customers in arrears - and added charges to customers' accounts to cover the administration fees for sending the letters.
Investigators found Wonga sent communications to customers 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. Wonga was using this tactic to maximise collections by piling pressure on customers.
Under the 1974 Solicitors Act anyone unqualified pretending to be a solicitor can be jailed for up to two years.
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.'
Wonga, which made nearly four million loans to one million customers in 2012, has agreed to identify and pay redress to all those affected, either through cash or a reduction in their outstanding balance.
The FCA has appointed an official to oversee the process and ensure customers receive what they are owed.
In April 2014, Wonga also reported to the FCA that it had discovered system errors relating to the calculation of amounts owing on customer accounts where fees, balance adjustments or the timing used to calculate interest were not consistently applied.
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