* OFT also proposing Competition Commission investigation
* Govt says to give new regulator 'teeth' to tackle issues
* Payday lenders provide short-term loans to borrowers
* Payday firms have been criticised for high interest rates
* 1.2 million Britons used payday loans last year
By Matt Scuffham
LONDON, March 6 (Reuters) - 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, after finding evidence of widespread irresponsible lending.
So-called payday lenders offer short-term loans, which are intended to be paid back when borrowers receive their wages. Critics say they charge excessively high rates of interest and take advantage of the vulnerable in a weak British economy where mainstream banks have cut back on short-term consumer lending.
The Office of Fair Trading (OFT) also said it proposed to refer the payday lending market to the Competition Commission after finding "deep-rooted" problems within an industry where annual interest rates on some loans top 4,000 percent.
"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.
The OFT said about 1.2 million Britons took out payday loans last year, borrowing about 2 billion pounds in the process.
Wonga, one of the biggest payday lenders in Britain, more than trebled its earnings last year. Its annual percentage rate (APR) stands at 4,214 percent, according to its website.
Wonga said on Wednesday that it recognised the concerns which the OFT had about the sector and agreed that there was a need for tighter control and regulation to stamp out the worst practices within the industry.
However, the firm said it made stringent checks on all applicants and turned down about two thirds of applicants asking to take loans for the first time. Wonga said it had not received specific information from the OFT on how it should improve its business.
After a year-long review, the OFT said it had found problems across the industry in areas ranging from advertising to debt collection, including from some of the biggest lenders.
The OFT found that payday lenders did not properly assess whether borrowers would be able to pay loans back and found that around a third of loans were repaid late or not at all.
Maxwell said some 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 findings are likely to result in some firms being closed down, according to one lawyer specialising in consumer finance.
"Twelve weeks to demonstrate to the OFT's satisfaction that they are fully compliant may prove too high a hurdle for some payday lenders," said Bill McCaffrey of CMC Cameron McKenna.
The government is considering bringing in tougher rules on how payday lenders advertise. They could face limitations on the number of television advertisements they can place in an hour and the times they can appear and will be forced to make sure their annual interest rates are properly displayed.
The Financial Conduct Authority, is to be given "new powers and real teeth" to enforce the rules which could come into effect in April next year, officials said. It will have the power to cap interest rates and to impose a limit on the amount of new loans lenders can offer.
"The government is introducing a fundamentally new approach to regulating consumer credit, which will ensure irresponsible firms and bad practice will have no place in the consumer credit marketplace," said Treasury Minister Sajid Javid.
Martin Wheatley, who will head up the FCA, said the new regulator will focus its resources monitoring "high risk" firms such as pay day lenders, pawnbrokers and debt collectors.
Britain's financial ombudsman services, which settles disputes where banks and their customers cannot reach an agreement, said it had seen a significant increase in the number of complaints about payday lending.
"The fact that we're seeing more complaints about payday loans is inevitable, as people who are finding it hard to obtain credit turn to payday lenders to make ends meet," said Chief Ombudsman Natalie Ceeney.
The OFT will decide whether to refer the industry to the Competition Commission in June.