Wonga to pay £2.6m compensation for fake debt firm letters

Britain's best-known payday lender, Wonga, has been ordered to pay more than £2.6m compensation after it was found to have sent threatening letters to customers from non-existent law firms.

The Financial Conduct Authority (FCA) said Wonga had been guilty of "unfair and misleading debt collection practices" after it emerged the lender had created fake law firms using the names of employees who in some cases still work for the company. The regulator said the firm would be compensating around 45,000 customers who received the letters, which threatened legal action over outstanding debts.

However, the firm escaped a potential financial penalty or worse because the FCA only started policing payday lenders in April 2014, and these practices occurred while the now-defunct Office of Fair Trading (OFT) was in charge.

Between October 2008 and November 2010, Wonga sent letters to customers in arrears under the names Chainey D'Amato & Shannon and Barker & Lowe Legal Recoveries – leading customers to believe that their outstanding debt had been passed to a law firm or another third party. Legal action was threatened if the debt was not repaid. The communications were typically headed up "Urgent message" and began: "We have been instructed by Wonga to recover from you a debt of £X ..."

In fact, said the regulator, neither Chainey D'Amato & Shannon nor Barker & Lowe existed. Wonga was using this tactic "to maximise [its] collections by unfairly increasing pressure on customers", it added. In some instances, Wonga also added charges to customers' accounts to cover the administration fees associated with sending the letters. It is a criminal offence for anyone to call themselves a solicitor or act as a solicitor if they are not one, but it is thought the offending letters and emails from the fake firms did not use the word solicitor.

Wonga, which is well-known for its TV adverts featuring puppets of older people, is the UK's biggest payday lender; in 2012 it made nearly four million loans to more than one million customers.

Earlier this month it emerged that a founder of the company, Errol Damelin, had quit as a director, just seven months after stepping down as chief executive.

To compound the company's woes, it has also been disclosed that Wonga will have to pay compensation to many current and former customers after it discovered that "system errors" had resulted in the miscalculation of some people's balances. Almost 200,000 customers overpaid Wonga as a result, the majority by less than £5, the company said. This occurred over a period of several years, though "a greater number" underpaid and will not be asked to repay the shortfall, said a spokesman.

The use of fake law firms was uncovered by the former consumer credit regulator, the OFT, in 2011, after Wonga was asked to disclose information about its debt collection practices.

This is not the first time the firm has been in trouble for its debt collection activities. In 2012 the OFT told it to clean up its act after it sent letters to customers accusing them of fraud.

The agreement with the FCA states that the lender must identify and pay redress to all affected customers. Some customers will receive cash, while others are likely to have their outstanding balance reduced. The regulator has appointed a "skilled person" to oversee the process and ensure customers get what they are owed.

In terms of the compensation relating to the threatening correspondence, there will be a flat-rate £50 settlement offer to all 44,556 customers sent letters, to reflect the distress and inconvenience they have suffered. Some will also receive a refund of the charges incurred for being referred to Barker & Lowe or Chainey D'Amato, which has been estimated at £400,000, and will be provided to customers who paid these fees. In some cases there may be extra compensation payments based on individual circumstances.

Where customers have overpaid Wonga, this will be reimbursed with interest, though the 8% rate - in line with the rate used by the Financial Ombudsman Service, said the firm - contrasts starkly with the 5,853% "representative" APR that the lender charges, as quoted on its website.

The process will start by mid-July, and compensation payments are likely to be paid from the end of July. Wonga has also disclosed that some customers' credit ratings "may have been impacted" by the systems errors.

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 Wonga has been working with us to put matters right for its customers and ensure these historical practices are truly a thing of the past."

Tim Weller, Wonga's interim chief executive, said: "This is not the proudest day in Wonga's history ... 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."

The company said "all the people directly involved in those practices are no longer with the business and have not been here for some time". It revealed that some of the names used to create the fake law firms "were people at the time who were in the business ... In some cases they are still at the company but they have no responsibility for this at all".

Weller added: "I would also like to apologise to customers affected by our system errors. We fully accept the impact on customers was negative in many cases and our priority is to ensure we deal quickly and fairly with customers who've been impacted, again in conjunction with the FCA."

Martin Lewis, founder of consumer website MoneySavingExpert.com, said he welcomed the action being taken, adding: "Using lawyers as fake as its puppets, then having the stomach to charge people for it, is a thuggish tactic, aimed at scaring and intimidating people who are already struggling."

It appears some sharp-eyed customers may have rumbled Wonga's tactics years ago; a MoneySavingExpert post dating from February 2010 states: "I have received an email from Wonga's email address saying they are Barker & Lowe, but when I googled their number and name, nothing is found. Just wondered if anyone had heard of them or whether my suspicions are right, that this is just Wonga's own made-up company to try to scare people a little."