Ofcom has threatened TalkTalk with fines of 10 percent if its turnover unless the company stops billing customers once their contracts have expired.
The regulator gave the telecoms provider a month to put its house in order after it received over 1,000 complaints from people who have been billed by TalkTalk and Tiscali, which the ISP owns, for services they haven't received.
For example, one web user continued to be billed by TalkTalk despite having switched to another landline provider, while a Tiscali customer received a bill for £609 after cancelling their contract with the ISP. When the bill remained unpaid, the ISP used the services of a debt collector to attempt to recoup the money.
TalkTalk said the problem related to "an issue with the cancellation process for ex-Tiscali customers caused by an error on a legacy billing system".
"We are resolving this by migrating all ex-Tiscali customers onto one network and billing system which will allow us to process cancellations much more effectively," The ISP said.
"TalkTalk Group has co-operated fully with Ofcom's investigation and we apologise for the inconvenience caused to this limited group of former customers."
Ofcom has given the ISP unti l2 December to resolve the issue, including issuing refunds to affected customers and halting any legal action, otherwise they will face a fine. The regulator said this could be up to 10 percent of the company's turnover.
"Ofcom is determined to stand up for consumers and take action against companies that break the rules," said Ofcom's Director of Consumer Affairs, Claudio Pollack.
"Our investigation into TalkTalk and Tiscali UK found that they had billed customers for cancelled services; this is unacceptable which is why we have ordered them to clean up their act or face the consequences."