By Matt Scuffham and Clare Hutchison
LONDON, June 27 (Reuters) - Britain's consumer watchdog has asked for a review into payday lenders after finding deep-rooted problems in the way the 2 billion pound ($3.1 billion) a year industry treats vulnerable customers.
The lenders, which make loans to be repaid when borrowers get their wages, have grown rapidly in Britain as banks have cut back on short-term credit after the 2008 financial crisis. But they have been attacked by politicians and consumer groups for charging sky-high interest rates and for shoddy treatment of borrowers.
'We have seen evidence of financial loss and personal distress to many people,' Clive Maxwell, chief executive of the Office of Fair Trading (OFT), said on Thursday.
The OFT said firms were profiting from loans that could not be paid back on time. It found about half of lenders' revenues come from fees charged for customers extending loans. And 20 percent of revenues came from loans which were extended at least four times.
The watchdog said it was difficult for customers to identify and compare the cost of loans from payday lenders and that not all firms complied with relevant laws. It also found that many of the borrowers had poor credit histories and limited access to other forms of credit.
It said lenders were competing primarily on the availability and speed of loans rather than on the price of paying them back.
Payday lenders typically hand out loans of up to 1,000 pounds. The OFT estimated around 8 million are made each year.
Firms such as Wonga, QuickQuid and Lending Stream have flourished as the banks have pulled back. Apart from the payday firms, customers have few alternatives other than to borrow from friends and family or from pawnbrokers such as H&T Group and Albemarle & Bond, which have also thrived.
In March, the OFT gave Britain's biggest 50 payday lenders 12 weeks to change their business practices or risk losing their licenses after finding evidence of widespread irresponsible lending.
Britain's Competition Commission will now investigate the industry, where annual interest rates on some loans top 5,000 percent. Lawmakers have already called for a cap to be set on the amount of interest charged.
Payday lenders are coming under scrutiny around the world. The U.S. consumer watchdog said in April that the loans were trapping borrowers in a cycle of debt and warned new rules could be on the way for the industry.
The Consumer Finance Association (CFA), which represents the industry in Britain, said the competition inquiry should have been deferred to allow improvements that firms have already made to take effect before they face further judgment.
'No other sector has faced such intense scrutiny in such a short space of time,' it said.
Wonga, one the biggest payday lenders in Britain, more than trebled its earnings last year. This month it lifted the annual interest rate on its loans to 5,853 percent.
The inquiry could upset Wonga's plans to launch a stock market flotation next year which analysts say could value the business at up to 1.5 billion pounds. Wonga said on Thursday the commission should review how consumers use and access all forms of short-term credit including overdrafts and credit cards.
Consumer Group Which? said the industry was rife with poor practice.
'People under financial pressure being given high-cost loans in minutes without proper affordability checks is a recipe for disaster,' it said.
The Citizens Advice Bureau, a charity that helps people with legal and financial issues, said the focus on speed meant payday loans were being handed out without proper checks.
'The industry is in desperate need of a transformation from predatory firms to a responsible short-term credit market,' said Citizens Advice Chief Executive Gillian Guy.
($1 = 0.6520 British pounds)
(Editing by Sinead Cruise and Jane Merriman) Keywords: BRITAIN PAYDAY LENDERS/
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