Compensation of over £2.6m is heading the way of more than 45,000 customers treated 'unfairly' by Wonga.
The FCA said this morning that the UK's biggest payday lender had been involved in "very serious misconduct"  and had been carrying out 'misleading' debt collection practices.
In an investigation begun by the Office of Fair Trading and taken forward by the FCA, Wonga was found to have sent letters to customers in arrears from 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.
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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."
The failings, which took place between October 2008 and November 2010, saw Wonga, and other companies within its group, use unfair debt collection practices.
Mr Adamson said this put customers under great pressure to make loan repayments that many could not afford.
The FCA said that during this time, Wonga sent communications to customers in arrears under the names "Chainey, D'Amato & Shannon" and "Barker and Lowe Legal Recoveries", leading customers to believe that their outstanding debt had been passed to a law firm, or other third party. Further legal action was threatened if the debt was not repaid.
Chainey D'Amato & Shannon nor Barker & Lowe existed and Wonga was using this tactic to maximise collections by piling the pressure on customers.
Wonga is the UK's biggest payday lender; in 2012 it made nearly four million loans to over one million customers. The agreement with the FCA says:
• Wonga must identify and pay redress to all affected customers. While some customers will receive cash, others will likely have their outstanding balance reduced.
• The FCA has appointed a skilled person to oversee the process and ensure that affected customers get what they are owed.
The process will start by mid-July with compensation likely to be paid from the end of July. It is thought that up to 45,000 customers could receive, between them, a total of over £2.6m in compensation.
The poor practice was uncovered by the former consumer credit regulator, the OFT, in 2011 in response to formal Notices requiring Wonga to disclose certain information about its debt collection practices. The FCA took over the investigation on 1 April 2014 when it became responsible for consumer credit.
In April 2014, Wonga also reported to the FCA that it had discovered system errors relating to the calculation of the amount owing on customer accounts where fees, balance adjustments or the timing used to calculate interest were not consistently applied.
Wonga will be contacting affected customers shortly.