Consumers pay more than £1.4 billion a year too much for payment protection insurance (PPI) because finance providers in the £5.4 billion PPI market fail to compete properly, according to a damning report released this morning by the Competition Commission.

The commission found that banks, mortgage and credit card providers made it difficult for customers to compare PPI policies or switch to change their insurance, while some used expensive PPI to subsidise cheap loan rates to win over customers.

PPI covers repayments on loans if the borrower is unable to and is usually sold by the lender at the time the loan is agreed. Many consumers mistakenly think that they must take out PPI or that buying the insurance will make it more likely that they will be given credit. As many as 7.5 million policies are taken out every year, with about 14 million policies active at any one time.

Peter Davis, deputy chairman of the commission, said: "We've found serious problems with the PPI market and customers are paying for the lack of competition. The way PPI is sold as an add-on to a loan or other credit product means that distributors escape the pressure they should face from competing suppliers".

Mr Davis has recommended a ban on selling PPI at the same time as a loan or even within a fixed time after the loan is taken out. It is

The Association of British Insurers admitted that there had been problems with the PPI market but said that improvements the industry had already implemented needed time to "bed in".

Nick Starling, director of general insurance and health at the ABI, said that cracking down on the sale of PPI could destroy the market, just as Britain heads for an economic downturn.

"It would be disastrous to leave many people unprotected to deal with unforeseen financial crisis," Mr Starling said.

The Office of Fair Trading (OFT) referred the PPI market to the commission for investigation in February following its study into the industry. The OFT was acting on a complaint from Citizens Advice that the PPI market was seriously harming consumers.

Which? today slammed PPI as a "bad product, inappropriately sold". The consumer group said that as many as two million people had been mis-sold PPI policies and called for a swift resolution to the commission's inquiry.

"Surely it's time to stop talking and start cleaning up this industry once and for all," Doug Taylor, Which? personal finance campaigns manager, said.

David Lipsey, chairman of the Financial Services Consumer Panel, which advises the Financial Services Authority, described PPI as the source of "inexcusable scandals for too long".

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