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.
Speaking at a parliamentary hearing, politicians said that the FCA must toughen up its oversight and rules for 'unscrupulous' short-term lenders as they target the financially vulnerable and lend them cash that is unlikely that they would be able to pay back.
Committee Chairwoman Margaret Hodge blamed payday loan companies for putting financially vulnerable people, who are on significantly low incomes, into a rapidly out-of-control debt spiral, by using 'predatory techniques.
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.
On 6 March, the Office of Fair Trading (OFT), which hands over regulation of the sector to the FCA in 2014, 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.
However, Pac's Hodge slammed the OFT for being ineffective and timid in its handling of the sector and that the watchdog had 'never given a fine to any of the 72,000 firms in the market and very rarely revoked a company's license.'
Pac said that bad practices by some of these firms were costing already hard-pressed borrowers at least £450m pounds a year.
OFT responded and said it had taken "strong, targeted action to tackle the areas of greatest risk to consumers" and that its powers were limited and that it was only able to impose fines in very limited circumstances.