The Office of Fair Trading will today refer the payday loan industry to the Competition Commission.

It could force them to change their business practices.

The OFT said competition is the sector wasn’t working, having “deep rooted” problems.

Martin Lewis of MoneySavingExpert.com, 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.

“We need to see a total cost cap put on these loans. This would stop the bait calls to tempt people not to repay, encouraging them to roll over the loans, racking up the interest.  We also need to see a closer link to credit scoring, to ensure responsible lending – and to stop people moving from lender to lender as their problems get worse, with no-one being able to spot the problem.”

Russell Hamblin-Boone, chief executive of the Consumer Finance Association, which represents the major short-term lenders operating in the UK, said: “The CFA and its members have always supported well-designed, well-implemented regulation in order to protect consumers and drive up standards. However, 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 before the industry faced further judgement. We urge the Competition Commission to take this into consideration during its inquiry.”