Wonga is to write off the debts of 330,000 customers after it admitted it has made loans to people who could not afford to repay them.

The move by the pay-day lender comes after an agreement with the Financial Conduct Authority (FCA) that requires it to make significant changes to its business immediately.

The review means that about 330,000 customers who are currently in excess of 30 days in arrears will have the balance of their loan written off and will owe Wonga nothing.

Approximately 45,000 customers who are up to 29 days in arrears will be asked to repay their debt without interest and charges and will be given an option of paying off their debt over an extended period of four months.

Wonga's new chairman Andy Haste 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."

Wonga will be contacting all customers by October 10 to notify them if they will be included in the redress programme. Customers should continue to make payments unless they are told to stop by the firm.

From today, the company has introduced new interim lending criteria and is working to put in place a new permanent platform as soon as possible.

Wonga said it would be accepting significantly fewer loan applications and that some existing customers would no longer be able to use the service.

Mr Haste said: "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."

When it took over regulation of consumer credit in April, the FCA requested information from Wonga which subsequently suggested it was not taking adequate steps to assess customers' ability to meet repayments.

FCA director of supervision Clive Adamson 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."

The total cost to Wonga of writing off loans and not imposing interest and other charges will be £255 million.

This is made up of £220 million lost through writing off the debts incurred by 330,000 of its customers and a further £35 million lost by not imposing certain fees and charges and not making debt collections.

Most of the £220 million has been accounted for already by Wonga and it expects the £35 million cost to feature in its accounting for 2014.

The total number of customers who will have their loans either completely written off or who will see some charges dropped comes to around one fifth of the 1.8 million people who have ever taken out a loan with Wonga.

Wonga's profits more than halved last year after it racked up £18.8 million in costs relating to a scandal over fake legal letters.

The company has said it expects it will be "smaller and less profitable" in the near term as it carries out the task of cleaning up its reputation.

In June, Wonga was ordered to pay compensation of £2.6 million by the FCA after sending threatening legal letters from fake law firms to 45,000 customers.

The regulator said Wonga had been guilty of "unfair and misleading debt collection practices" by creating fake companies to pressure struggling customers into paying their bills.

The seven-year-old firm, which unlike many payday lenders has its roots in the UK rather than the United States, has around one million customers and a default rate of around 7% on its loans.

Wonga is one of several payday lenders which recently signed up to a new real-time information sharing service, helping it to make more accurate decisions about who to lend money to.

Going ahead, Wonga plans to overhaul the image it presents to the public, especially through its advertising, in a way that cuts the risk of it inadvertently attracting the very young or vulnerable.

Wonga's cuddly, elderly puppets disappeared from TV screens in July, as Mr Haste said he was "very aware" of criticism of its marketing campaign. The firm has no immediate plans to launch a new advertising drive.

Which? executive director Richard Lloyd said: "Wonga's announcement is better late than never for struggling borrowers but it's clearly a result of the regulator taking a tougher approach. The FCA must keep payday lenders on a tight leash.

"We have long called for more responsible affordability checks and better advice. The next step must be a clamp down on excessive fees and charges across the board to show lenders that the FCA will continue to clean up the credit market."