Payday loan companies will face a Competition Commission inquiry, after the Office of Fair Trading confirmed it made a referral to the watchdog, on concerns over the market's "deep-rooted" problems.

The OFT said in a statement that it decided to refer the payday loan market to the CC because it couldn't tackle the issues that "prevent, restrict or distort competition" under existing laws and guidance.

The OFT, which hands over regulation of the sector to the Financial Conduct Authority (FCA) in 2014, outlined various areas of significant concern.

This includes:

  • Practices that make it difficult for consumers to identify or compare the full cost of payday loans, undermining competition over price for loans.
  • Barriers to switching between lenders when loans are rolled over that prevent other lenders competing for this business.
  • Variable levels of compliance with relevant laws and guidance leading to firms that do invest time and effort complying being at a competitive disadvantage to firms that do not.
  • A significant proportion of borrowers have poor credit histories, limited access to other forms of credit and/or a pressing need to borrow. The cost of the loan may therefore be a less significant factor for borrowers, which may weaken competition on price between lenders.

On 6 March, the OFT gave 50 payday lenders, which account for around 90% of their market, three months to change their business practices or risk losing their licences.

Since then, OFT said it has closed down three pay day lenders and has opened formal investigations into three others.

At the end of May, the Public Accounts Committee urged the Financial Conduct Authority to crack down on payday loan companies, which use 'predatory techniques' and lend money to consumers at astronomical interest rates.

The payday lending sector is worth £2bn ($3bn, €2.3bn) in the UK and is more than double the amount from 2008 to 2009.

Current figures show that this corresponds to between 7.4 and 8.2 million new loans.

Despite these loans being described as one-off short term loans, costing an average of £25 per £100 for 30 days, up to half of payday lenders' revenue comes from loans that last longer and cost more because they are rolled over or refinanced.

Interest rates on the short term loans can reach highly inflated levels. For example one of the UK's largest payday loan companies, Wonga, details representative APR of 4214% on its website.

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