Payday loans companies face competition inquiry after watchdog uncovers 'deep-rooted' problems with the industry OFT believe payday market does 'prevent, restrict or distort competition' Payday model based on offering unaffordable loans that punish borrowers System is more about speed of borrowing rather than how much it will cost Launch: Clive Maxwell, head of the Office of Fair Trading says payday lenders must be probed because of 'deep-rooted' problems with the industry Payday lenders have been referred for a full-blown investigation by the Competition Commission after the trading watchdog uncovered 'deep-rooted' problems with the industry. The Office of Fair Trading (OFT) said it decided to make the referral because it suspects that features of the market 'prevent, restrict or distort competition'. The 'fundamental' problems it has found, such as loans becoming far more expensive than struggling borrowers had expected, cannot be tackled by existing laws and guidance, it said. The Office of Fair Trading (OFT) decision is the culmination of a large-scale investigation into the £2 billion payday sector, including spot checks on household names such as Wonga. The OFT said it is concerned that lenders are mainly competing on the availability and speed of loan approval, rather than how much it will cost the borrower. It said: 'The competitive pressure to approve loans quickly may give firms an incentive to skimp on the affordability assessment which is designed to prevent irresponsible lending and protect consumers. The OFT is also concerned about business models that appear predicated on making loans which are unaffordable, leading to borrowers paying far more than expected through rollovers, additional interest and other charges. 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. Investigation: Companies like Wonga will be probed, who offer loans at 5,853% APR The commission has strong powers to ban or limit products and shake up whole markets. Tough new regulator the Financial Conduct Authority (FCA) will oversee the market from next April. The FCA's powers will include the ability to place a 'possible cap' on interest rates and ban or limit the number of rollovers lenders are allowed to offer, the OFT said. During its investigation, the OFT found that lenders get up to half of their revenue from loans which had been rolled over or refinanced. 240 - The number of payday lenders in the market. £2billion - The estimated worth of the sector. 50 - The number of payday lenders that were warned by the trading watchdog to prove they are up to scratch or risk being put out of business. 12 - The number of weeks the Office of Fair Trading (OFT) gave lenders to show that they have addressed the problems it has found. 30 - The number of payday lenders" websites that emphasised speed and quick access to cash over cost out of the 50 looked at by the OFT. 270 - The typical size of a payday loan in pounds. 12 or more - The number of consecutive rollovers that some payday customers had in the most severe cases found by OFT inspectors. 17 - The number of lenders out of the 50 inspected by the OFT that were found to actively promote rollovers in marketing material or at the point of sale as a "feature" of the loan. 50 - The percentage of payday lenders" revenues that the OFT found came from 28% of loans which are rolled over or refinanced at least once. 19 - The percentage of payday lenders" revenue that came from 5% of loans which were rolled over or refinanced four or more times, according to the OFT's findings. 38 - The number of lenders out of the 50 inspected by the OFT that failed to comply with at least one of the complaint-handling rules of the Financial Ombudsman Service. 7,221 - The number of people who sought help from debt charity StepChange last year who had five or more payday loans. 5,853 - The APR (annual percentage rate) advertised on loans from Wonga, one of Britain's best-known payday lenders. Wonga, which has more than one million active customers, argues that its APR figure is not a good reflection of the true cost of its loans, which are intended to be for a short-term period. A 'significant' number of borrowers have poor credit histories and a pressing need to get access to cash, meaning that the cost of the loan may be a less significant factor for borrowers and weaken competition on price, the watchdog said. The OFT said it is concerned that consumers find it hard to compare the full cost of payday loans. The practice of rolling loans over also means that other lenders cannot compete for this business and the borrower is trapped with their existing lender. It said the extent to which payday lenders stuck to the rules was 'variable', meaning lenders which invest time and effort complying are at a competitive disadvantage to those who do not. Mr Maxwell told BBC Radio 4's Today programme: 'We think there are fundamental problems in this market. In short, competition isn't working. It's allowing firms to profit from making unaffordable loans that can't be repaid on time, which is causing financial loss and distress to some people. 'The sorts of difficulties we've found include difficulties for borrowers to compare the full costs of loans in some circumstances and the difficulties for borrowers to switch lender at the point of rolling over a loan. 'We don't think changes can be made under existing laws and guidance. Rather, we think that the Competition Commission in looking at this can bring forward solutions if it finds problems. It could, as it has in other markets, ban a particular product or a feature of a product to make that market work more effectively. Charities and consumer groups, many of whom have seen rocketing numbers of people struggling with payday loan debt, welcomed the OFT's decision, although some questioned why action has not come sooner. Martin Lewis, creator of consumer help website MoneySavingExpert.com, called for a cap to be placed on the total cost of loans and said lenders should be forced to take more notice of poor credit histories. He said: 'Finally, politicians and regulators are picking up the ball. Yet it's shamefully late. Millions of people have already spent billions of pounds on these often disgustingly expensive debts that lead many people into financial hell. 'The lax regulation and enforcement in the UK means we've been easy pickings for these lenders. Couple that with the gradual diminishing of the Social Fund, which was the one route for people on benefits or with little cash to get short-term, interest-free loans, and it's no surprise so many people fall foul.' Complaints: Experts say the people taking these loans are left in an often endless spiral of debt because they cannot pay off the loan Citizens Advice chief executive Gillian Guy said its evidence has found that in two-thirds (64%) of cases loans come without any checks to make sure the borrower can afford to repay. She said: 'The industry is in desperate need of a transformation from predatory firms to a responsible short-term credit market.' Richard Lloyd, executive director of consumer group Which? said the market is 'rife with poor practice'. He said: 'This is a market where lenders are not competing fairly with each other on price but instead use speed and ease of access to entice customers into deals they cannot afford, so it is right to get the Competition Commission to investigate. People under financial pressure being given high cost loans in minutes without proper affordability checks is a recipe for disaster.