The Office of Fair Trading (OFT) is to carry out an investigation into the controversial payday loan industry in the new year, it confirmed this week.

While it did not formally announce the plans, it said in a response to a Department for Business (BIS) Select Committee call for evidence yesterday that it will probe the payday loan sector and other types of high cost credit.

The payday loan and short term loan industries have faced scrutiny in recent months, and only last week Labour MP Stella Creasy stepped up her calls for a cap on the cost of short-term, high interest loans, as new figures revealed 3.5 million Britons expected to need a payday loan in the next six months.

The Government announced in July it would conduct further investigations before deciding whether to cap the cost of such loans (see Martin Lewis' thoughts in his payday loans blog post).

In contrast, the OFT will check that lenders comply with its irresponsible lending guidance, though it is unclear on the scope of that investigation.

Joanna Elson OBE, chief executive of the Money Advice Trust charity, says: "Many families are feeling the strain caused by low wage growth, rising unemployment and increasing prices, this is a situation ripe for payday loan companies to exploit, and so it is vital that struggling households are protected from the poor practices of these companies that will only land them further in debt.

"We are pleased to see the OFT tackling poor practice in an industry that has been allowed too much free reign up to now."

A payday loan is where a lender hands out a relatively small sum, usually of a few hundred pounds, which must be paid back within a few weeks, often at or around a payday.

Fees are often around £25 per £100 borrowed. There are also hefty fees for late repayments which can result in charges that can add up to a large proportion, or even exceed, the amount borrowed.