The Office of Fair Trading continued its assault on the UK banking industry today by declaring that payment protection insurance was failing consumers and should be investigated by the Competition Commission.

The OFT said the insurance, which promises "peace of mind" for borrowers by guaranteeing their debt repayments in the event of sickness, accidents or unemployment was "overly complex", provided "less protection than customers think" and was "poor value".

The Watchdog’s damning conclusions come after a six-month investigation into the £5.5 billion industry and follows its crackdown earlier this year on credit card charges. The OFT has forced lenders to reduce card fees to £12 and is considering a similar move on bank overdraft charges.

John Fingleton, the chief executive of the OFT, said: "Following the work we have undertaken it is clear that many customers are failed by PPI. There is limited evidence the industry is taking steps to improve the situation, but we believe they will not make major improvements to competition in the market.

"Given our evidence and the scale of this market, our provisional view is that it would be appropriate for the Competition Commission to investigate further."

The OFT report said that PPI could be "worthwhile for some consumers" but added that the way people bought the insurance and their understanding of it "hinders competition". It said that credit card firms and banks issuing new cards or loans had an advantage at the point of sale - further damaging competition.

"The evidence also shows that PPI has low claims ratios compared to other insurance products and, with no evidence to suggest costs are high, it seems reasonable to assume that distributor profitability is sizeable," the OFT said.

Only 11 per cent of the revenue taken in premiums for PPI insurance on credit cards was paid out to policyholders last year, compared with 74 per cent for motor insurance.

Critics of PPI have long argued that the insurance is overpriced, riddled with exclusions and often mis-sold to people who would not be able to claim. No bank has yet issued a statement about the OFT’s decision.

The banks that generate the most profit from PPI, and have the most to lose from a clampdown, are Lloyds TSB, HBOS, Northern Rock, and Barclays.

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