Britain's consumer watchdog has given the UK's biggest 50 payday lenders 12 weeks to change their business practices or risk losing their licenses.
This comes after it finds evidence of widespread irresponsible lending.
The Office of Fair Trading also said it proposed to refer the payday lending market to the Competition Commission after finding "deep-rooted" problems within the industry.
"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," said Clive Maxwell, the OFT's chief executive.
''Payday lenders'' offer short-term loans, which are intended to be paid back when borrowers receive their wages.
People in the UK have increasingly turned to these loans as the economy struggles to recover from recession and mainstream banks have tightened their criteria for granting short-term credit.
Maxwell said payday lenders were earning up to half their revenue not from one-off loans, but from re-financed deals where unexpected costs can rapidly mount up for borrowers.
The OFT will make a final decision on whether to refer the industry to the Competition Commission by June.
