Geoff Brown, of Hampshire Credit Union, says the Office of Fair Trading guidelines make it clear there is "an overarching principle of fairness in dealing with people".
He says, based on the OFT's report, payday lenders are not following this advice and "need to".
Citizens Advice welcomed the Office for Fair Trading's (OFT's) decision to refer the payday lending industry to the Competition Commission for a full investigation, saying the lenders' focus on speed "means proper checks fall by the wayside".
Chief executive Gillian Guy claimed payday lenders are "recklessly quick to hand out loans" and should instead focus on the "cost of credit and how they treat customers".
Ms Guy said: "Citizens Advice evidence found that in 64% of cases loans come without any checks to make sure the borrower can afford to repay, revealing that lenders aren’t taking the time to establish whether a payday loan is suitable for the customer.
"Debts quickly spiral out of control as those struggling to repay are hit with high interest rates and charges.
"The industry is in desperate need of a transformation from predatory firms to a responsible short-term credit market.”
Martin Lewis, creator of consumer help website MoneySavingExpert.com, said the trading watchdog's decision to refer the payday lending industry to the Competition Commission was "shamefully late".
Mr Lewis called for a cap to be placed on the total cost of loans and said lenders should be forced to take more notice of poor credit histories.
He said: "Finally, politicians and regulators are picking up the ball. Yet it's shamefully late. Millions of people have already spent billions of pounds on these often disgustingly expensive debts that lead many people into financial hell.
"The lax regulation and enforcement in the UK means we've been easy pickings for these lenders.
"Couple that with the gradual diminishing of the Social Fund, which was the one route for people on benefits or with little cash to get short-term, interest-free loans, and it's no surprise so many people fall foul".
The Office for Fair Trading (OFT) said it is concerned that payday lenders are mainly competing on the availability and speed of loan approval, rather than how much it will cost the borrower.
The trading watchdog said:
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 is also concerned about business models that appear predicated on making loans which are unaffordable, leading to borrowers paying far more than expected through rollovers, additional interest and other charges.
The OFT's chief executive, Clive Maxwell, added, "The Competition Commission can now conduct a detailed investigation to get to the root causes and, if necessary, use its far reaching powers to fix the payday lending market".
The Office of Fair Trading (OFT) announced it has referred the payday lending industry for a full investigation by the Competition Commission.
Here are some findings about the industry:
- 240: Number of payday lenders in the industry
- Two billion: Estimated worth of the sector in pounds
- 50: Number of payday lenders warned by the OFT to prove they are up to scratch
- 12: Number of weeks lenders were given to show they had addressed the problems
- 270: Typical size of a payday loan in pounds
- 50: Percentage of payday lenders' revenues that the OFT found came from 28% of loans that are rolled over or refinanced at least once
- 12 or more: Number of consecutive rollovers that some payday loan customers had in the most severe cases found by OFT inspectors
- 5,853: The APR advertised on loans from Wonga, one of Britain's best-known payday lenders
The Office of Fair Trading (OFT) said it decided to refer payday lenders for a full investigation by the Competition Commission because it continues to suspect that features of the market "prevent, restrict or distort competition".
The "fundamental" problems the trading watchdog has found, such as loans becoming far more expensive than struggling borrowers had expected, cannot be tackled by existing laws and guidance, it said.
The Office of Fair Trading (OFT) decision is the culmination of a large-scale investigation into the £2 billion payday sector, including spot checks on household names such as Wonga.
The Office of Fair Trading has referred the payday lending industry to the Competition Commission because of concerns it has about "deep-rooted" problems with the way competition works.
Debt charities have accused lenders of being "out of control", by granting loans to people who cannot afford to repay them:
- More than 7,000 people who contacted debt charity StepChange last year had five or more payday loans - rocketing from just over 700 in 2009
- Charities have also reported seeing cases where people were drunk when they took out the loan or had mental health issues
- They have raised concerns that penalty fees and charges piled on top of interest can also mean that the cost of the debt balloons out of proportion with the original loan for a struggling borrower
- In one case seen by StepChange, a client faced a total debt of £1,830 for an initial loan of £120