The Public Accounts Committee found the organisation is overly reliant on complaints from the public, rather than pre-emptively looking for instances of malpractice in the market.
The MPs also say the “outdated and misleading” practice of measuring interest on an annual APR basis should be replaced with a headline figure showing the total cash amount required to repay a short-term loan.
“[The OFT] 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,” said committee chair Margaret Hodge MP.
Politicians have targeted the credit market after consumers turned to non-traditional forms of lending during the financial crisis.
The Consumer Finance Association, which represents leading payday lenders, said it supported the committee’s proposals to scrap APR figures and limit loan rollovers.
The OFT insists it has taken “strong, targeted action” and will next month decide whether to refer the payday loan industry to the Competition Commission.
The government has already decided to transfer regulation of the consumer credit market to the new Financial Conduct Authority from 2014.