Wonga Penalised £2.6m For 'Fake Legal Threats'

Britain's biggest payday lender, Wonga, has been ordered to pay £2.6m in compensation to customers threatened with bogus legal letters.

The Financial Conduct Authority (FCA) said 45,000 customers were hit by unfair and misleading debt collection practices, which included people 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.

Amid questions over why the company was not heavily fined, FCA chief executive Martin Wheatley told Sky News the punishment would likely have been harsher had the offences taken place after it assumed regulatory responsibility for the payday market.

Wonga apologised for its behaviour, insisting it was in the past and confirmed to Sky News that it had not been contacted by the police.

Those affected will get at least £50 in compensation each

The FCA said it uncovered communications to customers in arrears under the names "Chainey, D'Amato and Shannon" and "Barker and Lowe Legal Recoveries", leading customers to believe their outstanding debt had been passed to a law firm or other third party.

Neither Chainey D'Amato and Shannon nor Barker and Lowe actually existed.

Wonga, which made nearly four million loans to over one million customers, has been ordered to pay compensation to each person 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.

All 45,000 customers who were sent letters will be offered a flat rate of £50 for their distress and inconvenience.

On top of this, those who were charged fees, thought to total £400,000, for the fake legal letters will be refunded.

The FCA will ensure Wonga contacts every victim

The scandal is a huge PR blow to Wonga, a company that had consistently distanced itself from criticism of an industry repeatedly under fire over loan totals, advertising, repayment fees and poor treatment of customers.

Tim Weller, who was made interim CEO of Wonga 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."

Wonga added that it had identified "certain system errors" which had resulted in the miscalculation of some customers' balances, which meant some had overpaid, although a greater number underpaid.

The lender said existing customers who had overpaid would receive the money back with interest while the others would not be asked to pay the shortfall.

Martin Lewis, founder of the MoneySavingExpert.com website, said of the bogus legal letters: "This just shows that while Wonga hires expensive marketing, PR and public affairs consultants to try to position itself as 'the good guys in a bad industry', it's all a sham.

"I'm glad to see the FCA taking action. I hope this is just the first move against a dirty, dangerous industry."

On the question of whether Wonga could be taken to court by victims, Dean Nicholls, consultant at Gordon Dadds Solicitors told Sky News: "The hallmark of fraud is dishonesty. This was clearly dishonest, causing financial loss and distress to those affected.

"Although the affected individuals could seek redress through the court, in view of the seriousness of the misconduct the regulator has stepped in, to make sure those affected receive fair compensation."

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