The Office of Fair Trading (OFT) said it decided to make the referral because it continues to suspect that features of the market “prevent, restrict or distort competition”, according to Channel 4 news.

The “fundamental” problems it 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 OFT decision is the result of a large-scale investigation into the payday loans sector, including spot checks on household names such as Wonga.

The OFT said it is concerned that lenders are mainly competing on the availability and speed of loan approval, rather than how much it will cost the borrower.

“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,” it said.

“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”.

During its investigation, the OFT found that lenders get up to half of their revenue from loans which had been rolled over or refinanced.

The commission has strong powers to ban or limit products and shake up whole markets. The new regulator the Financial Conduct Authority (FCA) will oversee the market from next April.

The FCA’s powers will include the ability to place a possible cap on interest rates and ban or limit the number of rollovers lenders are allowed to offer, the OFT said.

Clive Maxwell, OFT chief executive, said: “Competition appears not to be working properly in the payday lending market, allowing firms to profit from making loans that cannot be paid back on time.

“We have seen evidence of financial loss and personal distress to many people. 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.”

Joanna Elson, chief executive of the Money Advice Trust, said: “Payday loans have come from nowhere to be one of the most common debt problems people face. In 2007 as the financial crisis began National Debtline took just 465 calls for help with payday loans, but last year that figure had grown to 20,013.

“The rapid emergence of payday lending seems to have caught regulators a little off guard. We are pleased that the Competition Commission can now look at this from a new angle.

“Our National Debtline advisers help around 100 people every day to deal with payday loan debts, many callers have rolled over their loan with the same company multiple times. We hope the Competition Commission will consider how best to prevent serious problems occurring in this way.

“Anyone struggling with payday loan debts should take a look at this National Debtline factsheet and contact our helpline for further guidance.”