* Letters from non-existent law firms threatened legal action
* Compensation to be paid to 45,000 customers
* "Shocking new low" for payday industry - consumer group (Adds comments from Wonga, consumer group and Church of England)
By Steve Slater
LONDON, June 25 Britain's biggest payday lender Wonga will pay 2.6 million pounds ($4.4 million) in compensation to 45,000 customers after sending them bogus letters from non-existent law firms that threatened legal action.
The short-term loan industry has come under increasing scrutiny from politicians, regulators and even the Church of England for high levels of interest rates that cause hardship for many of its customers.
In some instances Wonga added charges to customers' accounts to cover the administration fees of sending the bogus letters, according to the findings of an investigation begun by Britain's Office of Fair Trading and taken on by the Financial Conduct Authority (FCA).
The financial watchdog said the unfair practices between October 2008 and November 2010 had put customers under great pressure to make loan repayments that many could not afford.
"It's a shocking new low for the payday industry that is already dogged by bad practice and Wonga deserves to have the book thrown at it," said Richard Lloyd, executive director at consumer group Which?.
The bogus letters were sent to customers under the names of 'Chainey, D'Amato and Shannon' and 'Barker and Lowe Legal Recoveries', neither of which existed.
The FCA ordered Wonga to offer all 45,000 customers a flat rate of 50 pounds for distress and inconvenience and to refund those who had paid legal charges, estimated at 400,000 pounds.
The Archbishop of Canterbury Justin Welby has pledged to drive Britain's payday lenders out of business by supporting credit unions as an alternative. Former regulator Hector Sants is leading a new financial taskforce set up by the Church as part of its campaign.
"This highlights the need for more responsible alternatives to payday lending and other forms of high cost credit," a Church of England spokesperson said of the problems exposed at Wonga.
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's interim CEO Tim Weller on Wednesday said he apologised "unreservedly" for the "unacceptable" practice. the company also apologised for unrelated systems errors that resulted in a miscalculation of some customers' balances.
The company's former chief executive, Niall Wass, last month quit just seven months after taking on the role from the former co-founder Errol Damelin. This month Damelin, who co-founded the firm in 2006, quit as a director of the company.
Wonga made a 62.5 million pound profit in 2012, benefiting from a surge in applications as household budgets were squeezed and banks cut back on credit.
($1 = 0.5892 British Pounds) (Reporting by Steve Slater and Kirstin Ridley; Editing by Jane Merriman and Elaine Hardcastle)