Most payment protection insurance (PPI) is a rip-off, according to a damning report from the Office of Fair Trading (OFT).

The regulator is investigating the £5.4 billion a year sector following complaints that consumers are paying too much for poor cover. In its preliminary report it concludes that PPI, which is routinely sold alongside personal loans, mortgages and credit cards, is indeed poor value, overly complex and has a much lower rate of successful claims than other types of insurance.

It will issue full findings, including details of any action it intends to take, later in the year.

Pula Houghton, senior policy adviser at Which?, the consumer organisation, said: "The OFT's study into PPI reads like a horror story. PPI policies are complex, lack transparency and offer poor value for consumers, but are a good source of profits for industry."

Between 6.5 million and 7.5 million of the policies, which are designed to cover debt repayments if borrowers become ill or lose their job, are taken out each year. The OFT’s report highlights numerous flaws including:

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