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 lender 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.

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 holding themselves out as a solicitor can be jailed for up to two years. However, Wonga did not use the protected term and for that reason the Solicitors Regulation Authority said it would not be taking any action of its own. 

A Law Society spokesperson said: 'It is concerning that Wonga’s customers were treated in this way. The FCA – as Wonga’s financial regulator – has dealt with this matter internally. To check whether a law firm is regulated, the public can verify solicitors’ credentials on the Law Society’s Find A Solicitor search facility and with the Solicitors Regulation Authority.'

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 recompense those affected. 

Compensation will consist of a refund of charges on referral to Barker and Lowe/Chainey D’Amato, which has been estimated at £400,000 and will be provided to customers who paid these fees. A flat rate £50 settlement offer for distress and inconvenience will be made all 45,000 customers sent letters. 

The FCA has appointed an official to oversee the process and ensure customers receive what they are owed. Asked why Wonga was not fined as well as required to pay compensation, the regulator said that because the failings happened between 2008 and 2010, before the successor to the Financial Services Authority regulated payday loans, its rules did not apply.

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.

Last September Wonga reported pre-tax profits of £84.5m for 2012.

Andrew Caplen, Law Society vice president, appeared on the BBC’s Newsnight programme last night to discuss the legal and consumer aspects of the Wonga case. Watch the broadcast.