LEADERS of the campaign against payday lenders have heaped pressure on watchdogs to take action against the controversial credit firm Wonga.

With the recently established Financial Conduct Authority due to decide within months whether to award Wonga a full licence, the Treasurer of Scotland's largest council said the credibility of the new agency was on the line over how it handled the firm.

It comes after it emerged Wonga, which currently has only an interim licence to operate under new rules, had sent threatening letters from non-existent law firms to customers in arrears.

About 45,000 people are to receive compensation totalling £2.6 million over the case after a ruling by the City regulator. But in a letter to the FCA's chairman, senior Glasgow councillor Paul Rooney compared the industry to "the Wild West".

He wrote: "I fear for the credibility and the effectiveness of the FCA if its only response to such a flagrant abuse of corporate power is to tell the offender to say sorry.

"While the negative publicity associated with this case will, undoubtedly, harm Wonga in the short-term, it is no kind of deterrent to those other lenders that will actively seek to stretch, and break, the limits of regulation in pursuit of profit.

"During our investigations last year, even some of those representing the payday lending industry likened the culture within parts of the market to the Wild West. If the FCA is to act as sheriff, then communities and consumers need to be confident it can act fairly and decisively to protect them."

In his letter to John Griffith-Jones, Mr Rooney said Wonga had given evidence to Glasgow's investigation into the local payday lending market last week, with executives assuring the city council "of their high standards in relation to debt management".

Mr Rooney claimed Wonga had failed to reveal they were the subject of a major investigation into their debt collection practices. He wrote: "While I applaud the FCA for having brought this Wonga scandal to light, I am deeply concerned by what appears to be a lack of any kind of meaningful sanction for an appalling breach of trust and total disregard for basic ethical standards.

"The FCA is a new body and I appreciate that the legislative loopholes and the legal red tape that currently tie your hands in relation to levying fines in respect of this case are, while ridiculously short-sighted, not of your design.

"However, I do not accept that the FCA is powerless in this case.

"Something many people will find hard to understand is why a lender that has employed such brazenly dishonest tactics ... is still in possession of a consumer credit licence."

In some cases, Wonga charged customers administration fees for sending the letters between late 2008 and 2010. The firm used the names of "law firms" Chainey, D'Amato & Shannon and Barker & Lowe Legal Recoveries. Legal action was threatened if the debt was not repaid.

It emerged last week the FCA met with officers from the City of London Police to discuss Wonga, with the force announcing it was looking into whether there was enough evidence to start a criminal investigation.

Wonga interim chief Tim Weller said: "We would like to apologise unreservedly to anyone affected by the historical debt collection activity and for any distress caused. The practice was unacceptable and we voluntarily ceased it nearly four years ago."

An FCA spokesman said that as the agency had only been recently established it was unable to sanction retrospectively. But he added that various factors would be considered when Wonga's licence to operate in the financial sector was being considered.