The City Watchdog has been urged to act against payday lenders which can’t justify their high charges.
Which? has called on the Financial Conduct Authority to investigate lenders accused of having excessive default fees.
Richard Lloyd, executive director at Which? said: “It’s outrageous that lenders are charging excessive fees which tip people into further debt.”
The consumer group’s investigation uncovered 10 payday lenders with default fees of £20 or more. Four actually charge £25 and above, while Britain’s most-profitable payday lender Wonga has the highest default fee at £30.
Many other payday lenders get by with significantly lower default charges of £12. Back in 2006, the Office of Fair Trading found that penalty charges for credit cards should be no more than £12, unless there are exceptional factors.
Which? believes that excessive default fees are unlawful under the Unfair Terms in Consumer Contracts Regulations 1999, which state it is unfair for consumers to be charged a disproportionately high fee if they are in breach of contract.
Default fees should be no higher than the administrative costs associated with dealing with the default, the consumer body argues.
It has called for the FCA to introduce a cap on the level that firms can charge in default fees, as part of the cap on the total cost of credit planned for January 2015.
"These fees should be fair, proportionate and only reflect lenders’ costs," said Richard Lloyd. "Payday lenders have failed to produce any evidence to justify their excessive fees since we challenged them so it is now time for the regulator to step in."