The action follows a year-long review of the £2bn payday lending sector by the Office of Fair Trading in which it found evidence of widespread irresponsible lending and failure to comply with standards.

The new rules are aimed at 50 leading lenders, which account for 90 per cent of the payday market.

The OFT also proposes to refer the payday lending market to the Competition Commission after it found evidence of deep-rooted problems in how lenders compete with each other.

The review found evidence of problems throughout the lifecycle of payday loans, from advertising to debt collection, and across the sector, including by leading lenders that are members of established trade associations.

The OFT said payday lending is its top enforcement priority.

Borrowers often have limited alternative sources of credit and are frequently in a vulnerable financial position. Combined with this, the high rates of interest charged by many payday lenders can make the consequences of irresponsible lending particularly acute.

Despite payday loans being described as one-off short term loans, costing an average of £25 per £100 for 30 days, up to half of payday lenders’ revenue comes from loans that last longer and cost more because they are rolled over or refinanced, the OFT said.

Clive Maxwell, OFT Chief Executive, said:

“We have found fundamental problems with the way the payday market works and widespread breaches of the law and regulations, causing misery and hardship for many borrowers. Payday lenders are earning up to half their revenue not from one-off loans, but from rolled over or re-financed deals where unexpected costs can rapidly mount up.

“We are proposing to refer this market to the Competition Commission, which has wider powers to get to heart of the problems in this market and to identify and impose lasting solutions that protect consumers.”

Consumer group Which? welcomed the crack down on irresponsible lending.

Executive director, Richard Lloyd said: “Which? research has repeatedly found poor affordability checks and excessive charges that push consumers into a vicious cycle of debt. So a referral of the payday market to the Competition Commission to consider its future is a good move but there must also be no delay in taking immediate action to protect people in difficulty today.

“We want all the regulators involved to immediately crack down on payday lenders who flout the rules and use their new powers to take strong, proactive action to clean up the whole of the consumer credit market.”