Wonga, the controversial payday lender, has been forced by the new City regulator to write off £220m of loans to 375,000 borrowers that it now admits should never have been given loans.

The company, which charges annualised interest rates of up to 5,853% a year and has been accused by MPs of “legal loan sharking”, said it would entirely wipe out loans to 330,000 people, and scrap interest and charges owed by a further 45,000 customers.

Some of the loans are understood to be more than a year old and have ballooned from a few hundred pounds to thousands.

Wonga’s new chief executive, Andy Haste - who has been brought in to overhaul the tarnished brand – said the company had been wrong to lend money to people who could never afford to pay it back.

“We are taking action to address the failing of the past. This business had been too focused on growth and cared more about the loan outcome than the customer outcome. We are clearly very sorry for what’s happened to our customers and are doing everything to put that right.”

He said Wonga lacked experienced credit professionals and “lent to people we should not have lent to”, adding: “The checks were not sophisticated enough and not strong enough.”

Wonga was forced to take action by the City watchdog, the Financial Conduct Authority, in an unprecedented crackdown on the payday loans industry. FCA officials have investigated Wonga’s practices at its offices in Camden, north London, and have hauled in Haste and other bosses to its head office in Canary Wharf.

Wonga was required to write off the debts because the FCA found that it had granted the loans without checking people could afford the repayments. The checks were found to be so poor that many borrowers had no chance of ever repaying the loan because of their dire financial circumstances, with many living on unemployment or disability benefits.

“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,” said Clive Adamson, the FCA’s director of supervision. “This should put the rest of the industry on notice – they need to lend affordably and responsibly.”

The latest FCA action comes just months after Wonga was censured by the regulator for sending threatening letters to its customers from fake law firms named after its employees.

Wonga will write off all the outstanding debts of 330,000 people who are more than 30 days in arrears. A further 45,000 people who are less than 30 days in arrears as of 2 October can repay their loans without interest or charges. The customers affected will be notified by 10 October.

Wonga refused to state the original value of the loans or how long they had been outstanding. It estimated the write offs – which are more than five times its annual profits – will cost it about £35m as it has already made provisions for many of the loans never being repaid.

Haste, a respected City veteran who joined the company in the summer, said he would “not apportion blame” to Wonga’s founder Errol Damelin, who quit the firm in June.

Damelin described Wonga’s interest rate as a “great deal” and called for tougher regulation to “keep the bad guys out”. The lender, he claimed, used sophisticated algorithms to ensure it did not lend to people who couldn’t afford to repay.

Damelin, who founded Wonga in 2006, had hoped to collect a £100m windfall from floating Wonga on the stock market at a suggested £1bn valuation. Sources at the company said plans for a float have been scrapped.

Haste said the company, which has been accused by the Archbishop of Canterbury of destroying lives, needs an urgent image overhaul and may even change its name.

MPs on Thursday called for Haste, Damelin and other Wonga bosses past and present to be hauled before parliament.

John Mann, a Labour MP on the Treasury select committee, said: “I welcome today’s latest step to crack down on irresponsible payday lenders … this is a company that has taken advantage of people in dire financial circumstances.

“Sadly, it comes as no surprise to learn that Wonga knowingly lent money to people who will never be able to afford to repay a loan and it is morally right that they have been forced to write off these loans.

Fellow Labour MP and Treasury select committee member Pat McFadden, said: “These findings drive a coach and horses through the claim that Wonga has been lending responsibly.”

Andrew Tyrie, the Conservative chairman of the Treasury committee, said: “Many consumers are still being treated badly by financial firms – new cases just keep coming. We will want reassurance that these firms have cleaned up their act, and Wonga may well be one of them.”

Stella Creasy, the Labour MP who has campaigned against payday lenders’ practices and was subjected to personal attacks from Wonga staff, welcomed the FCA’s crackdown but said writing off the loans “does not go far enough to make up the damage and misery caused to so many lives … The FCA are clearly turning over stones and finding some very unpleasant things underneath”. “They will have my full support if they see something criminal and want to take action.”

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Wonga said it intended to make good affected customers’ credit ratings and was contacting credit reference agencies.

The company could be forced to make further payouts in the future as the FCA searches for other Wonga customers who should not have been granted loans but did manage to pay them off.

Wonga said it had changed its lending criteria immediately to put greater scrutiny on customers finances and their “loan to income ratio”. It will also prevent people who have been in arrears or rejected for a loan from reapplying for at least 30 days. Previously someone who had made late repayments, but then paid off a loan could immediately apply for another one.

Wonga warned investors, already reeling from a 53% fall in profits announced on Tuesday, that the changes will lead to “a material drop in the number of loans to new and existing customers”.