Payday lender Wonga is to pay £2.6 million to customers after the company was found to have sent fake letters threatening legal action from made-up law firms.
The "unfair and misleading debt practices" will see some 45,000 customers compensated after the firm sent out fake letters to those in arrears, making them believe their debt had been passed on to law firms that were threatening action if the debt wasn't settled.
The Financial Conduct Authority (FCA), who investigated the firm, said that the practices took place between October 2008 and November 2010 and put customers under "great pressure" to make repayments they couldn't afford.
The letters came from firms called Chainey, D'Amato & Shannon and Barker and Lowe Legal Recoveries.
In some cases, Wonga even added additional charges to customers' accounts to cover the cost of sending the fake letters.
Wonga has apologised and the compensation process will begin from mid-July.
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."
Tim Weller, interim Wonga CEO, 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."
Customers who have been affected by the scam do not need to do anything as they will be contacted by Wonga shortly, the FCA added.