The Student Loans Company (SLC) sent graduates letters under the name of a fake debt recovery firm to frighten them into paying up, it has emerged.

The tactic has been used since 2005 for people in arrears but came under scrutiny after payday lender Wonga was ordered to pay £2.6 million for using fictional law firms.

Wonga was ordered to compensate the 45,000 people who received letters from “Chainey, D’Amato and Shannon” and “Barker and Lowe Legal Recoveries”.

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In the SLC’s case, the ruse was “Smith Lawson & Company”.

The letters read: “We are instructed by our client, in connection with the sum outstanding shown above.”

The Office for Fair Trading had already ordered the SLC to change the letters in March and a new format was developed removing the reference to a “client” and increasing the size of the footer saying Smith Lawson was part of the Government subsidiary.

In the House of Lords on Thursday, Liberal Democrat peer Lord Paddick asked what action the Government was taking over the “misleading practices”.

“The practice of companies sending threatening letters falsely representing themselves as debt collection agencies is something that we might expect of payday loan companies, but not of a government agency”, he added.

Lord Ahmad of Wimbledon said only two Smith Lawson letters had been sent since the matter was brought to the Government’s attention on 27 June and Vince Cable was meeting with SLC officials.

Unlike Wonga, no charges were made for the letters, and Smith Lawson was registered properly as a trading name, he added.

Lord Phillips of Sunbury told the House talks with the SLC were not enough and called for the chairman, Christian Brodie, to resign.

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“This is straightforward deceit,” he said.

“If any student were engaged in deceit of this nature he or she would be thrown out of their university or denied a job prospect. Surely we must start to set an example.”

A spokesman for the SLC said the use of Smith Lawson branded correspondence had been “suspended”.

He added: “The Smith Lawson collection process has been used since 2005 to support collection activities and was mainly used after the initial in-house collections process had been exhausted for customers who had persistently defaulted on their loan repayments and were in arrears for a minimum of three months.”

The SLC is chasing repayments from around 3.5 million people and reports to the Department for Business, Innovation and Skills.