The Office of Fair Trading (OFT) has confirmed it is to refer the payday loans market to the Competition Commission to investigate "deep-rooted" problems.
It announced its decision following a period of consultation, having already issued the market's biggest participants with an ultimatum to clean up their act or risk being closed down.
The OFT said it decided to make the referral because it continues to suspect that features of the market "prevent, restrict or distort competition" and it could not tackle them under existing laws.
The areas of concern include:
:: 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.
Payday firms are accused of making loans that cannot be paid back in time :: 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.
The watchdog said it was also worried that lenders were competing primarily on the availability and speed of loan approval, rather than price and that some business models appeared to be predicated on making loans which were unaffordable, leading to borrowers paying far more than expected through rollovers, additional interest and other charges.
It said lenders appeared to derive up to 50% of their revenue from such practices.
The OFT had previously identified a series of other issues, including lenders not carrying out proper affordability checks before lending or rolling loans over.
Consumer groups say many penalties for late payments are extortionate Firms were also accused of failing to explain adequately how payments will be collected and acting aggressively to claw back debts.
The OFT said it expected responses by the end of July from all 50 payday lenders it contacted earlier this year, giving them 12 weeks to demonstrate they complied fully with their legal obligations.
To date, five of the 50 lenders have informed the OFT that they have left the payday market while three firms not included in the crackdown have had their consumer credit licences revoked.
Clive Maxwell, OFT chief executive, said "We have seen evidence of financial loss and personal distress to many people.
"The Competition Commission can now conduct a detailed investigation to get to the root causes and, if necessary, use its far reaching powers to fix the payday lending market."
Payday lenders expressed disappointment at the OFT's decision and urged the commission to take into account their own attempts to clean up the industry and give borrowers more protection.
Russell Hamblin-Boone, chief executive of the Consumer Finance Association, said: "No other sector has faced such intense scrutiny in such a short space of time.
"We would have preferred the inquiry to have been deferred to allow the significant improvements that lenders have made to take effect."
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