Image caption Payday loans have led some people into a spiral of debt

The Office of Fair Trading (OFT) has referred the payday lending industry to the Competition Commission because of concerns about "deep-rooted problems with the way competition works".

The OFT said it found that customers found it difficult to identify or compare the full cost of payday loans.

It added that there were barriers to switching between lenders when loans were "rolled over".

But the lenders involved said they are already changing their practices.

'Unaffordable' loans

The OFT said it was also concerned that competition was based on speed rather than cost.

"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 said in a statement.

The OFT also said that some of the business models of companies operating in the payday loans industry were causing concern, because they were "predicated on making loans which are unaffordable, leading to borrowers paying far more than expected through rollovers, additional interest and other charges".

Media playback is unsupported on your device Media caption Mark Todd and his partner Sheila Lund are £3,000 in debt after taking out payday loans

It said that lenders appeared to make 50% of their revenues from such practices.

Debt spiral

About two million people in the UK use payday loans. The products are designed as short-term access to cash, at relatively high cost, until the applicant is next paid.

However, in many cases, individuals have struggled to repay and the compounded interest of loan after loan has left them in a spiral of debt.

This is what happened to Mark Todd, a former NHS consultant from Huddersfield.

He took out a payday loan while waiting to get back into work after being the full-time carer of his father. However, he was unable to find work and took out an additional loan to cover the first one.

"It was irresponsible of us to borrow, but it was also irresponsible of them to lend. They were under no pressure, we were under lots," he said.

Media playback is unsupported on your device Media caption Clive Maxwell, OFT: "We think there are fundamental problems in this market"

He was concerned about the operations of brokers, as much as the loan companies themselves.

"Once they have got their teeth into you, they never let go. You just get email after email, text after text, all saying you are approved for x amount of money today," he said.

"When you have got nothing at all and you are struggling to put a meal on the table, then someone sends you a text saying we have got £300 for you ready and waiting right now and it will be in your account in 15 minutes, it is too difficult to say no sometimes."

The OFT will decide whether individuals such as Mr Todd should have had more choice over which payday loan to choose, based on the costs involved.

Improvements

The body which represents payday lenders, the Consumer Finance Association (CFA), said it welcomed well-designed regulation, but was unhappy about the scrutiny that the industry has received.

Image caption Russell Hamblin-Boone of the CFA says responsible lenders are already improving their practices

"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," said Russell Hamblin-Boone, the CFA's chief executive.

He said that responsible lenders had already changed their practices since the OFT began its inquiry.

As part of a code of conduct that was introduced in November 2012, CFA members only allow a loan to be rolled over three times at most.

There is a programme to "freeze" repayments, should borrowers get into financial difficulty.

And some lenders are much more transparent about costs than they were.

"Large lenders will quote the total cost of the loan," Mr Hamblin-Boone told the BBC.

"For example, they will say that a £100 loan for 30 days costs £25," he said.

"But other lenders have a less customer-centric approach."

The CFA represents most of the 80 largest lenders, including the Money Shop and Cheque Centre, but at least 100 lenders do not belong to a trade association.

Lenders, consumer groups and regulators have been summoned to a summit about payday lending at the Department for Business next week.

The meeting aims to come up with solutions to the "widespread irresponsible lending" highlighted by the OFT's report into the payday industry.