The Office of Fair Trading has given 50 payday lenders, which account for around 90 percent of their market, three months to change their business practices or risk losing their licences.

The orders were delivered in a statement on the OFT's website, after it uncovered widespread evidence of irresponsible lending and failure to comply with required standards.

The OFT emphasised that the 50 lenders investigated must demonstrate within 12 weeks that they are fully compliant or risk losing their licence. Failure to cooperate with this process will trigger enforcement action.

"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. Payday lenders are earning up to half their revenue not from one-off loans, but from rolled over or re-financed deals where unexpected costs can rapidly mount up," said Clive Maxwell, OFT chief executive..

"We are proposing to refer this market to the Competition Commission, which has wider powers to get to heart of the problems in this market and to identify and impose lasting solutions that protect consumers," he adds.

Particular areas of non-compliance include lenders failing to conduct adequate assessments of affordability before lending or rolling over loans, and failing to explain adequately how payments will be collected.

Other areas of non-compliance include using aggressive debt collection practices and not treating borrowers in financial difficulty with forbearance.

The payday lending sector is worth £2bn [$3bn; €2.3bn] in the UK and 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 percent on its website.

The Market Investigation Reference consultation paper published Wednesday sets out the OFT's proposed decision and invites comments by 1 May 2013.

The OFT expects to make a final decision on referring the payday market to the Competition Commission by June 2013.