Tough probe into payday loan firms

Commission to launch an investigation after companies fail the trading watchdog's tests

The Competition Commission will launch a hard-hitting investigation into payday loans companies, which can see borrowers charged more than 4,000 per cent APR, next week.

The Office of Fair Trading will refer the £2bn sector to the commission on Thursday, according to sources close to the regulators.

The leading 50 payday lenders, which share about nine-tenths of the market, are understood to have failed the OFT's tests on whether their practices are up to scratch.

They were given three months to improve practices such as properly checking whether or not people could afford the loans and making sure that they didn't offer to roll-over the loans to the extent that they ruined people's finances.

In March, the OFT published a report damning payday loan companies for irresponsible lending.

The commission has tough powers to tackle what the OFT described as loans that have caused "misery and hardship".

These powers include banning the companies' financial products.

Payday loans have become increasingly popular since the onset of the financial crisis in the summer of 2007, which has forced them into the spotlight.

Last month, an influential committee of MPs even accused regulators of failing to tackle "predatory" payday loan companies, arguing that they operated in the "shabby end" of the market.

Public Accounts Committee chairwoman Margaret Hodge said that the OFT had been "ineffective and timid in the extreme" in waiting for customers to complain that the loans were unaffordable before taking action.

The investigation is the latest in a number of high-profile probes that the commission is undertaking.

Among the most fiercely contested is its inquiry into the audit market, where the so-called Big Four accountants – PricewaterhouseCoopers, KPMG, Deloitte and Ernst & Young – run the numbers on more than 95 per cent of the FTSE 350.

In its provisional findings into the audit market, the commission has recommended a number of tough measures to foster greater competition, such as forcing listed firms to change auditor after a set number of years.

In a response to the findings published last week, KPMG argued mandatory rotation would "increase the chance of audit mistakes".