Ineffective regulators have failed to get to grips with "predatory" lenders who leave vulnerable customers struggling with spiralling debts, according to a damning report by a powerful committee of MPs.
The "shabby end" of the credit market was costing borrowers £450 million a year, the Public Accounts Committee said, but the Office of Fair Trading (OFT) had not taken the tough action needed to protect consumers.
Committee chairwoman Margaret Hodge said the OFT had been "ineffective and timid in the extreme" in tackling the problem.
The MPs called for the requirement to display the annual percentage rate (APR) of interest on credit to be replaced with a clearer statement of the total amount repayable on the loan, to help consumers understand and compare different products.
Mrs Hodge said: "With money getting tighter and banks lending less, consumers are increasingly having to turn to alternative providers of credit. Some of these lenders use predatory techniques to target vulnerable people on low incomes, encouraging them to take out loans which, when rolled over with extra interest, rapidly become out-of-control debts.
"Such disgraceful practices by the shabby end of the credit market are costing borrowers an estimated £450 million or more each year. Meanwhile, the Office of Fair Trading, the regulator of this sector, has been ineffective and timid in the extreme. It passively waits for complaints from consumers before acting. It has never given a fine to any of the 72,000 firms in this market and very rarely revokes a company's licence.
"It doesn't understand the market - how much each firm lends and who its customers are - and can't be certain if directors of companies that have run into trouble are now running other companies."
She criticised the OFT for failing to increase its £1,075 fee, which applied even to large credit card firms, in order to "raise its game as a regulator" with the extra revenue. In March the OFT handed 50 payday lenders a 12-week deadline to prove their good behaviour or risk losing their licences to trade, which the MPs said was an "encouraging" step.
Mrs Hodge said: "It is encouraging to see that, since our hearing, the OFT has announced plans to crack down on unscrupulous behaviour by the 50 largest payday lenders. We will be expecting the OFT to show that this marks the start of a genuine step up from the inadequate approach that was evident at our hearing - and to follow through on its threat to revoke licences if these lenders do not mend their ways."
The OFT will be replaced as the consumer credit regulator by the Financial Conduct Authority next year, and the report said the new watchdog "needs to have a fundamentally different and more robust approach".