Media playback is unsupported on your device Media caption OFT chief executive Clive Maxwell: "This is not just a few rogue firms"

Payday loan firms have been told to change their behaviour after the Office of Fair Trading (OFT) found evidence of "widespread irresponsible lending".

The OFT is giving the biggest 50 firms 12 weeks to change their practices, or risk losing their licences.

It also plans to refer the market to the Competition Commission, after it found "deep-rooted" problems in how payday loan companies compete.

In response, the loans industry said it was already changing its operations.

The government has also announced plans to "weed out rogue lenders" and place further controls on the way they are allowed to advertise.

'Fundamental problems'

The OFT did not name the companies that it studied, but said they covered 90% of the payday loans market in the UK.

Among the poor practices identified were:

a failure to work out whether people could afford the loans

"aggressive" debt collection practices

a failure to explain how repayments are collected

a lack of sufficient forbearance for those who cannot afford the repayments

In addition, it said the high rates of interest charged by payday lenders could make the consequences of irresponsible lending "particularly acute".

"We have found fundamental problems with the way the payday market works and widespread breaches of the law and regulations, causing misery and hardship for many borrowers," said Clive Maxwell, the OFT's chief executive.

The OFT said too many people were granted loans they could not afford to repay.

It also said that payday lenders relied on many people not being able to pay off their original loans on time, forcing them to take out new loans.

Although they are often described as one-off short term loans, costing an average of £25 per £100 for 30 days, it said up to half of payday lenders' revenue came from loans that last for a longer period.

New restrictions

The government has also set out plans of its own to clamp down on the practices of payday lenders.

It wants lenders to face new restrictions on how they advertise, and it is to consult with the industry on a new code of practice.

We recognise there are concerns about the industry. However, these reports are a snapshot in time, and work is already underway Russell Hamblin-Boone, Consumer Finance Association

"The government will work closely with the Office of Fair Trading, Advertising Standards Agency, Committees of Advertising Practice, and industry to make sure advertising does not lure consumers into taking out payday loans that are not right for them, said Jo Swinson, the Consumer Affairs Minister.

But the government has decided against the idea of a cap on interest rates, following a report into the issue from Bristol University.

In the past, some companies have charged rates of up to 1,700%, according to Which?

The government also said that the new Financial Conduct Authority (FCA) will have stronger powers to deal with payday lenders when it takes over the role from the Financial Services Authority in April 2014.

"The FCA will have more rigorous powers to weed out rogue lenders," said Jo Swinson.

Those powers will enable it to impose a cap on interest rates, should it choose to do so.

Media playback is unsupported on your device Media caption Christopher Swords was baffled by the amount of interest he was charged

Consumer and debt organisations have welcomed the announcements.

"The referral of the payday market to the Competition Commission is a good move," said Richard Lloyd, the executive director of Which?

"But there must also be no delay in taking immediate action to protect people in difficulty today," he added.

The StepChange Debt charity said the average payday loan debt had now risen to £1,657.

It said that the figure was now far higher than the average client's net monthly income.

Change in practices

In response to criticism from the OFT, the loans industry said it had already made changes to the way it operates.

"We recognise there are concerns about the industry. However, these reports are a snapshot in time, and work is already underway," said Russell Hamblin-Boone, chief executive of the Consumer Finance Association (CFA).

The CFA said it was now credit-checking all loan applications, to address the issue of affordability.

It has already introduced a limit on the number of times a loan can be rolled over or extended.

And it said the industry was now helping those who were in financial difficulty. For example, its member companies will refer people to free debt advice services, and will reschedule loan payments if customers cannot afford to pay them.

In addition, it said lenders would now freeze interest charges and debts, where necessary, to prevent people getting further in to debt.