The Office of Fair Trading has finally agreed to investigate the payday loans industry after a long-running campaign by The Independent and others.
The OFT will probe accusations that high-cost, short-term lenders prey on vulnerable people, such as the unemployed or those on benefits.
It will look into claims that they are irresponsible and hand out loans without checking whether borrowers can actually afford to repay them.
It will question payday lenders about how they treat borrowers who get into difficulties amid growing evidence that they do not treat them fairly.
Finally, it will focus on the practice of rolling over loans, so that those who fail to repay on time quickly end up with unaffordable rising debt.
David Fisher, the OFT's director of consumer credit, said: "We are concerned that some payday lenders are taking advantage of people in financial difficulty."
The OFT will review 50 major payday lenders, and could shut down those it finds are operating irresponsibly. However, it refused to name the lenders it will investigate.
The Labour and Co-operative MP Stella Creasy has led a campaign to end legal loan sharking since last year.
"I'm glad the OFT has finally admitted there's a problem, but its investigation won't solve things," she said. "We need stronger regulations. The current law is too weak. The point with the payday loans industry is that there is so much money to be made that as soon as you crack down on one rogue firm, another simply takes its place." Yesterday Ms Creasy visited a branch of the Cheque Centre, which has just opened in her Walthamstow constituency, the 11th high-cost credit lender in the area.
"I will be reporting them to the OFT as they fail to publish the cost of credit – the APR – anywhere at their branch," she said.
The Labour MP Yvonne Fovargue, chair of the All-Party Group on debt and personal finance, welcomed the OFT investigation. "Payday lending has become a rising problem, with more people looking at the loans as an easy was to escape a short-term problem but quickly ending up in a spiral of debt," she said. "I hope the OFT will recommend that regulation is necessary.
The Independent reported last month that the online payday lender Wonga was forced to remove an article from its website that suggested students should take out expensive payday loans rather than using government-backed Student Loans, which charge around 5 per cent rather than 4,000 per cent.
The OFT has promised to report back on its investigation later this year.
Loans by numbers
4,000%: Typical APR charged by payday lender
1,000: Complaints about payday lenders every year to the ombudsman
50: Payday lenders are to be reveiwed by the OFT – those found to be lending irresponsibly could be closed