Rent-to-own retailer BrightHouse has been told to pay £14.8m to 249,000 customers by the financial regulator, the Financial Conduct Authority (FCA).
BrightHouse will compensate customers who had cancelled agreements after one downpayment but had not been refunded.
It will also make payments to those who signed up to lending agreements that “may not have been affordable”.
The FCA said BrightHouse had not acted as a “responsible lender”.
The firm, which lets customers pay for household items such as washing machines and televisions on a weekly basis, has been criticised for its business model.
In 2016 a BBC investigation conducted by Ed Miliband, the former Labour leader, highlighted the example of a £358 washing machine that ended up costing more than £1,000.
BrightHouse has apologised to customers about failing to refund them.
There is no need for customers affected to contact BrightHouse. It will write to 213,000 current and former customers by the end of the year, explaining what they are due.
Customers whose deposits BrightHouse failed to refund signed up between April 2010 and April 2017. These customers will receive an average payment of £27.
The second group includes those who took out an agreement between April 2014 and September 2016. They will get an average of £147.
In the case of customers who were not assessed properly at the start of the loan who may have had difficulty making payments, BrightHouse will pay back interest and fees along with compensatory interest of 8% – if they return the goods.
Those who kept the goods will have their balances written off.
FCA chief executive Andrew Bailey told Radio 5 Live the move set a “very important precedent … BrightHouse did not behave as responsible lenders and they failed to meet our expectations”.
Lois Grant, from York, worked for BrightHouse from 2012 to 2016 as a branch manager in Yorkshire and London but left because of “unacceptable” high-pressure sales techniques.
“In the early days, we did not ask people about their expenditure at all. We just checked what their income was. They changed that policy because the FCA came to investigate, asking for more stringent checks.
“I can’t remember ever giving any money back to any customer. This is despite one of their policies that said if you cancel within 14 days you would get a refund. I know from several experiences that rarely happened, if ever.”
Citizens Advice said it had helped more than 13,000 people with rent-to-own issues over the past 12 months, many of whom were struggling to make payments on essential goods such as fridges and washing machines.
“We’re pleased to see that the FCA are taking action against BrightHouse whose loose lending practices have pushed the very people who can least afford it further into financial difficulty,” said its chief executive, Gillian Guy.
The charity said it had found one in five rent-to-own customers spent 20% or more of their income on payments, and more than half had to take on other debts to cover the costs.
It is asking that the same conditions apply to all forms of high-cost credit as the payday loans cap – meaning that no one would pay more than what they borrowed in interest and charges.
Separate criticism came from the Financial Inclusion Centre, a think tank that compiled a report into the company last year. It said BrightHouse had made profits of £162m last year, up from £63m in 2007-8.
Gareth Evans, a co-director of the think tank, said this had come at a personal cost for some customers, with some having to prioritise repayments over food or heating.
BrightHouse chief executive Hamish Paton sincerely apologised to those affected: “We’re absolutely determined that this doesn’t happen again and have made significant improvements over the last 18 months.”
The firm said it had overhauled its application process to ensure future loans were affordable and that customers were treated fairly during the collections process.
BrightHouse was founded in 1994 as Crazy George and rebranded as BrightHouse in 2002. It is owned by private equity firm Vision Capital and has about 280 stores.