SEVERAL payday lenders are facing formal investigations over the use of "aggressive debt collection" methods, the trading watchdog has announced.
The Office of Fair Trading (OFT), which is carrying out a compliance review into the industry, is also writing to all 240 lenders in the market to outline its concerns about poor practices in the sector.
It said it expects to warn the majority of 50 firms it has inspected, which account for the lion's share of payday loans, that they risk enforcement action if they do not improve their standards.
The OFT has not named any particular firms involved at this stage or said how many are being formally investigated, but it will publish a full report in the new year setting out whether wider action is needed to tackle the problems.
It said that in several cases it had uncovered evidence that calls into question the continuing fitness of lenders to hold a consumer credit licence, which they need to trade.
David Fisher, OFT director of consumer credit, said: "We have uncovered evidence that some payday lenders are acting in ways that are so serious that we have already opened formal investigations against them. It is also clear that, across the sector, lenders need to improve their business practices or risk enforcement action."
The regulator raised concerns in its interim report that payday lenders' advertising often appears to target people who are already in financial difficulty and encourage them to roll over loans.
Around a third of payday lending websites looked at by the OFT included statements such as "no credit checks", "loan extension guaranteed" and "extend loans up to four or five times". The report said: "If true, these would indicate irresponsible lending and failure to carry out adequate checks on affordability."
Debt charity StepChange, formerly the Consumer Credit Counselling Service, recently said more than 2,000 of its clients this year have had five or more payday loans, representing a three-fold increase from 2009.
The OFT said it had also found evidence of firms using misleading or deceptive practices to try to recover a debt. The report said: "Whilst they relate to a small minority of firms, some of the practices fall well below the standards we expect, which is why we have launched several formal investigations."
© Press Association 2012