LONDON The Office of Fair Trading has given the UK's biggest 50 payday lenders 12 weeks to change their business practices or risk losing their licenses, after finding evidence of widespread irresponsible lending.
So-called payday lenders offer short-term loans, which are intended to be paid back when borrowers receive their wages. Critics say they charge excessively high rates of interest and take advantage of the vulnerable in a weak British economy where mainstream banks have cut back on short-term consumer lending.
The OFT also said it proposed to refer the payday lending market to the Competition Commission after finding "deep-rooted" problems within an industry where annual interest rates on some loans topped 4,000 percent.
"We have found fundamental problems with the way the payday market works and widespread breaches of the law and regulations, causing misery and hardship for many borrowers," said Clive Maxwell, the OFT's Chief Executive.
Wonga, one of the biggest payday lenders in Britain, more than trebled its earnings last year. Its annual percentage rate (APR) stands at 4,214 percent, according to its website.
The OFT said it had found problems across the industry in areas ranging from advertising to debt collection, including from some of the biggest lenders.
Maxwell said some payday lenders were earning up to half their revenue not from one-off loans, but from re-financed deals where unexpected costs can rapidly mount up for borrowers.
The government is considering bringing in tougher rules on how they advertise, officials said.
They could face limitations on the number of television advertisements they can place in an hour and the times they can appear and will be forced to make sure their annual interest rates are properly displayed.
The Financial Conduct Authority, is to be given "new powers and real teeth" to enforce the rules which could come into effect in April next year.
"The government is introducing a fundamentally new approach to regulating consumer credit, which will ensure irresponsible firms and bad practice will have no place in the consumer credit marketplace," said Treasury Minister Sajid Javid.
The FCA will have the power to cap interest rates and to impose a limit on the amount of new loans lenders can offer.
The OFT will make a final decision on whether to refer the industry to the Competition Commission by June 2013.
(Reporting by Matt Scuffham, editing by Paul Casciato)