Wonga is to pay more than £2.6 million in compensation after it sent threatening letters from non-existent law firms to customers in arrears.
The controversial payday loans firm yesterday "apologised unreservedly" for sending the demands from the fictitious companies to try to force people to make loan repayments.
About 45,000 people are to receive compensation over the case after a ruling by the City regulator, the Financial Conduct Authority (FCA).
In some cases, Wonga added charges to customers' accounts to cover administration fees for sending the letters between late 2008 and 2010.
Wonga used the names of "law firms" Chainey, D'Amato & Shannon and Barker & Lowe Legal Recoveries. Further legal action was threatened if the debt was not repaid.
The regulator said Wonga had put pressure on customers to pay.
Citizens Advice Scotland head of policy Susan McPhee welcomed the ruling and said it would act as a warning to the industry to clean up its act.
She added: "Wonga's conduct in this example is completely unacceptable and more befitting of a backstreet lender.
"The idea that one of the UK's fastest-growing financial companies can think it's acceptable to make up fake legal firms to bully customers is extraordinary, and it is of course right that they have been penalised for this."
Richard Lloyd, executive director of Which?, said the case marked a "shocking new low" for the payday industry.
He said: "Wonga deserves to have the book thrown at it. The FCA must now also clamp down on excessive fees and charges, starting with default fees charged by some payday lenders, to show it is serious about getting a fairer deal for borrowers."
Tim Weller, interim chief executive of Wonga, 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."