The Office of Fair Trading has referred the market for payday lending to the Competition Commission due to concerns over deep-rooted problems with the way competition works.
The OFT announced its provisional decision to refer the market in March and carried out a public consultation.
Having considered responses, the OFT thinks the issues go deeper than can be addressed through existing laws and guidance.
The OFT is concerned lenders are competing primarily on the availability and speed of loan approval, rather than price.
The OFT considers the Competition Commission is best placed to investigate and help resolve the fundamental problems.
By referring the market now, the work of the Commission will be able to provide the Financial Conduct Authority (FCA) with a sound evidential basis on which to develop its rules and apply its new powers after it takes over responsibility for regulating the payday market from April 2014.
Following publication of its Compliance Review in March, the OFT wrote to 50 leading lenders giving them 12 weeks from receipt to demonstrate they comply fully with their legal obligations and the standards expected.
The letters were issued on a rolling programme and the OFT has received responses from 20 of the 50 lenders, with all responses expected by the end of July.
To date, five of the 50 lenders have informed the OFT that they have left the payday market, including two that have surrendered their consumer credit licences altogether.
In addition to the 50 lenders written to, the OFT has also revoked the licences of three other payday lenders.
Clive Maxwell, OFT Chief Executive, said: “Competition appears not to be working properly in the payday lending market, allowing firms to profit from making loans that cannot be paid back on time. 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.
“In the meantime, we are using the powers available to us to crack down on payday lenders that breach the law or OFT guidance.”
For any legal advice about pay-day lenders, call PM Law solicitors in Sheffield on 0114 2965444.