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".