THE difference between a loan shark and a payday lender is a piece of paper.

One entrepreneur is not distinguished from the other by stupendously brutal interest rates, the harassment of the poor and vulnerable, or the ability to attract public disgust. But the payday people, with their enticing TV ads and their patter, have licences.

That's all. It is the only thing that separates the contemptibly criminal from the allegedly respectable. The Office of Fair Trading (OFT) hands out these permissions and it has been doing so lately as though gullibility was going out of style.

The licences don't hinder the payday lenders much. They place no restrictions whatever on the interest rates that can be charged. If, like Wonga, you feel the need to inflict an annual percentage rate of 4215%, the OFT will insist only that you state the fact. But it will certainly not prevent you from rolling over loans as often as you like.

The name of the game is debt bondage. Very lucrative it is, too, even when those afflicted are drawn from the most desperate sections of society. In less than a decade the payday industry has grown from a £100 million-a-year business to a parody of banking worth £2 billion annually. Those involved are not fans of reform.

The gimmick was devised, like so many of civilisation's bounties, in America. In that democracy, real wages have been depressed for a generation; job security has been eroded while income inequalities have widened. This was going on even amid a supposed credit boom. Millions were excluded from the security, such as it was, of conventional banking. They became easy victims for the subprime hustlers and the "temporary" payday advance.

If any of this now sounds familiar, that's no accident. Even British poverty has become Americanised, with wages frozen or falling and credit "difficult". You could therefore dismiss payday borrowing as fecklessness – many do – or another example of just how stupid people can be. But by one estimate there are 1.75 million adults in Britain without a proper bank account and nine million with no access whatsoever to credit.

For contrast – the current figures are certainly higher – 1.2 million people availed themselves of payday loans in 2009. They took out 4.1 million loans between them. Last month, meanwhile, Which? reported that almost 40% of such borrowers took the money to buy food; 20% to pay the rent; 32% to obtain electricity, nappies and such items. The "typical amount owed" was £1458, equivalent to a month's wages in this income bracket. Half said they couldn't repay their debts.

So you come to the simple, possibly naive, question: How in hell is any of this legal? How is it that a Government watchdog with the word "fair" in its title is barred from preventing effective interest rates of 3000%, 4000%, even 5000%? In defining the word "usury", the Chambers dictionary deploys the word "iniquitous". That will do.

There's no secret to any of it. Watch the small print on the incessant, grisly daytime TV advertising – between the PPI vultures and the ambulance-chasing lawyers – and you see the numbers. Then ask why Government, both varieties, has done nothing for a decade. And ask especially why the Coalition has resisted reform. Christmas is coming and the cost of everything – fuel, food, average rents – continues to rise. Many get themselves into debt at this time of year with their little plastic cards. For those with children, it is almost impossible to resist. Most will spend the coming year paying for this holiday. But for those mired in payday loans, the only answer is another advance. Then comes another loan to settle the last loan, just to keep the debt scavengers at bay. For the companies involved, tis the season to be jolly.

Last week, the Government allowed the issue to go all the way to the House of Lords before some glimmerings of common sense were detected. Faced with a Labour amendment backed by the next Archbishop of Canterbury, among others, to its Financial Services Bill, the Coalition agreed that the Financial Conduct Authority – a watchdog which is less busy than it ought to be – could cap payday loan interest rates.

It will not be an automatic cap, however, and nor was the Coalition prepared to hazard a guess at the level at which rates become, in the archbishop-elect's words, "clearly usurious". Lord Sassoon, the relevant Treasury minister, fretted – feel free to be incredulous – that a cap applied automatically "could harm the interests of the users of payday loan firms". It's a start, though.

It won't hold back the tide of misery. It won't alter the thinking of zealots who count action on 4000% interest rates as "a major market intervention". In the Lords debate, no-one paused to wonder why "normal" credit on plastic cards can touch 30% when savers with respectable banks are lucky to get 2%. A generation is being impoverished. The payday predators would not have it any other way.

Legislation, work and decent wages are the only answers. Whatever your views, that ought to stand to reason, and even the Coalition is not immune to that virtue. Thus far, the Government has spent £435m on the Work Programme to put people in the kind of jobs that might render payday loans obsolete. The private firms and charities involved are, meanwhile, being "incentivised" with (allegedly) payment by results. It' is called a market solution. What could go wrong?

Of 18 contractors making promises, none have met the target set. That was low enough: 5.5% of referrals were supposed to be found jobs lasting at least six months. Instead, 31,240 people were placed from a grand total of 877,880 referred. This amounts to a "key performance measure" of 3.56%. In some areas, the results were much worse. In language most of us can understand, the Government spent just under £14,000 per job from its outlay of £435m.

Will ministers be scrapping this failed experiment then? Not when the reputation of private-sector "solutions" is at stake. They say the scheme simply needs more time, unlike those pinning their hopes on its success. Ministers also intend to write stiff letters to the contractors which have swarmed over the jobless like fleas on a dog. This has been, in the jargon, a "learning experience". A half-billion-pound learning experience.

Local interest might settle on a couple of firms. One is Working Links, whose performance measure was 3.56%. That's 1550 souls from a total of 43,480 referrals. It does have a lovely website, though, packed with the language of "inclusion".

Another Scottish operator rejoices in the name Ingeus UK Ltd. It too makes lots of happy noises. It too found six-month jobs for rather fewer people than the Government hoped. By some accounts, 1770 folk from a total of 43,730 would probably have found work had the company never existed. Since (I happen to know) it devotes itself to role-playing "training" games, and rejoices when a graduate is packed off for interview to a fast-food kitchen, I won't pretend to be surprised.

Payday loans on the one hand, £14,000 a skull for a handful of non-jobs on the other. Meanwhile, the majority of the population sees its bills rise, its savings wither, and the gulf between rich and poor widen like a crevasse beneath their feet. Scroungers, clearly, one and all.