(Corrects story label to read WONGA instead of WONGA-FINE, no change to text)
LONDON, June 25 Britain's biggest payday lender Wonga will pay 2.6 million pounds ($4.41 million) in compensation to 45,000 customers after sending them bogus letters from non-existent law firms that threatened legal action.
Britain's financial watchdog said the "unfair and misleading" debt collection practices took place between October 2008 and November 2010 and put customers under great pressure to make loan repayments that many could not afford.
Wonga is the biggest short-term lender in Britain and has come under fire, along with the industry as a whole, for the high level of interest rates it charges.
In some instances Wonga added charges to customers' accounts to cover the administration fees of sending the bogus letters, according to the findings of the investigation begun by Britain's Office of Fair Trading and taken on by the Financial Conduct Authority (FCA).
The FCA ordered Wonga to offer all 45,000 customers a flat rate of 50 pounds for distress and inconvenience as well as to refund those who had paid legal charges, estimated at 400,000 pounds.
The payday loan industry is under increasing scrutiny from politicians and regulators. The FCA, which took over responsibility for consumer credit in April, has been cracking down on the industry to tackle the way cash-strapped consumers are treated when they struggle to repay loans.
One in three high-cost, short-term loans goes unpaid or is repaid late in Britain and the FCA wants lenders to help people regain control over their debt and treat debtors with more sympathy as part of a drive to change the culture in financial services to focus on customers, rather than profit.
Wonga's interest rates can equate to as much as 5,853 percent a year, though its loans are only supposed to be held for a short period of time, often to provide funds for someone until they are paid. In 2012 it made nearly 4 million loans to over one million customers.
Wonga apologised to customers for the debt collection practices and also unrelated systems errors that resulted in a miscalculation of some customers' balances. ($1 = 0.5892 British Pounds) (Reporting by Steve Slater and Kirstin Ridley. Editing by Jane Merriman)