Wonga has been ordered by the Financial Conduct Authority (FCA) to make significant changes to its business and wipe the debt of thousands of borrowers.
The action follows a review into the payday lender's relending rates, which found it was not taking the appropriate steps to assess a borrower's ability to meet repayments in a sustainable manner.
As a result Wonga has had to enter into an agreement known as a voluntary requirement (VREQ) that means it has to make significant changes to its business immediately and provide forbearance to those impacted by the firm's poor lending practices.
Tips on how to manage your debt
New lending criteria
From today Wonga will introduce a new interim lending criteria that meets the FCA's affordability requirements and standards.
A new permanent lending set of criteria will be put in place at a later date with the help of an independent 'Skilled Person' appointed by the FCA.
Wonga has agreed to forbearance for existing borrowers whose loans were made under the old affordability criteria.
The FCA says around 330,000 borrowers who are currently in excess of 30 days in arrears will have the balance of their loan written off.
Avoid hefty interest rates: find the right credit card for you
Wonga will be contacting all customers by 10th October to inform them if they will be included in the forbearance programme.
The FCA says borrowers should continue to make payments unless they are told to stop by the firm.
Wonga says it will work with the FCA to identify if any further remedial action is required
Compare personal loans
What the FCA says
Clive Adamson, director of supervision at the FCA, said: "We are determined to drive up standards in the consumer credit market and it is disappointing that some firms still have a way to go to meet our expectations. This should put the rest of the industry on notice – they need to lend affordably and responsibly.
"It is absolutely right that Wonga's new management team has acted quickly to put things right for their customers after these issues were raised by the FCA."
What Wonga says
Andy Haste, who joined Wonga as Group Chairman in July, said: "We want to ensure we only lend to those who can reasonably afford the loan in question and during my review, it became clear to me that this has unfortunately not always been the case. I agreed with the concerns expressed by the FCA and as a consequence of our discussions we have committed to taking these actions.
"It's clear to me that the need for change at Wonga is real and urgent. Our regulator is determined to improve standards in consumer credit and I share that determination. There is much to do in order to make Wonga a sustainable and accepted business, and today's announcement is a significant step forward in that process."
End of Wonga?
It's not been a good year for Wonga.
In June, the payday lender was ordered to pay compensation for its dodgy debt collection letters.
And earlier this week it emerged the penalty, which totalled £10 million, has caused the firm's profits to halve.
This latest remedial action ordered by the FCA is likely to further impact the company's fortunes.
More on payday loans on AOL Money
Number of people with payday loan debt problems soars 42%
New payday lender rules take effect