Banks should be banned from selling payment protection insurance (PPI) alongside loans and be clearer about the costs, the Competition Commission said today.

The commission has proposed a ban on the sale of PPI to a customer within 14 days of being sold a loan, credit card or mortgage. It said this will give consumers more time to shop around for the best PPI deal and encourage greater competition between providers.

The report also calls for single premium policies, where consumers pay for the insurance upfront, to be outlawed, and advertising made clearer.

The proposals, which come after a 21-month investigation, have provoked howls of outrage from banks and loan providers which sell the insurance. PPI is one of the last big moneyspinners for banks such as Lloyds TSB, Barclays and HBOS, worth an estimated £3.5 billion. There have been threats to push up the cost of loans if the proposals are implemented.

The British Bankers Association said: "It is totally without conscience to encourage people to borrow without back up. The Competition Commission is simply wrong to suggest people should be prevented from taking advantage of products designed specifically to cushion the effects of accident, sickness and unemployment at the very time they are considering taking out a loan. This is an irresponsible decision exposing vulnerable customers to economic difficulty when they may need help most."

The Association of British Insurers' director of general insurance and health Nick Starling said: "By effectively denying consumers PPI in the very economic climate that they need it most, the Competition Commission has got this completely wrong. Unemployment claims on PPI policies have grown by 69 per cent in the last twelve months, showing just how valuable this cover is proving to be.

"If the Commission continues down this path it will kill the PPI market altogether, leaving millions of consumers with no protection at all.”

However, consumer groups welcomed the crackdown on the sale of the controversial insurance, pointing to evidence that it has been widely mis-sold.

The insurance is supposed to pay out if borrowers are unable to make repayments on loans, credit cards, store cards or mortgages because of accident, sickness or unemployment. But it has been under intense scrutiny since Citizens Advice referred a complaint to the Office of Fair Trading in 2005, amid claims that policies are riddled with exclusion clauses and are difficult to claim upon.

Alliance & Leicester was recently fined £7 million for what the Financial Services Authority (FSA) called the "most serious mis-selling" of PPI. In January HFC Bank, a lender owned by HSBC, was fined £1.1m for failing to treat customers fairly when selling PPI.

Which?, the consumer organisation, found that thousands of consumers have been misled into taking out PPI on their credit cards because they wrongly thought their application was more likely to be accepted.

The Financial Ombudsman Service (FOS) has also demanded that the FSA take action to stop banks fobbing off customers who had complained to them about PPI being mis-sold.

The FOS, which settles disputes between firms and customers, said that it had seen a jump in complaints about PPI. It is getting about 100 complaints a day, making it the biggest source of grievances.

PPI has also come under fire for being expensive and difficult to buy. The Competition Commission's preliminary report, published in June, concluded that 14 million consumers were being overcharged by an estimated £1.4 billion, or an average of £100 a year.

It said that consumers faced higher prices and less choice than they would if there were effective competition. It found that PPI providers made it difficult for customers to compare policies or switch to a better deal, while some used expensive insurance to subsidise cheap loan rates to win over customers.

Peter Vicary-Smith, Chief Executive of Which?, the consumer organisation, said:“This is a huge victory for consumers who have often felt pressured into buying expensive and inadequate PPI products. This sounds the death knell for shoddy protection and is a wake up call to the industry to develop useful products that consumers actually need.”

The ban on the sale of PPI policies when consumers take out loans will force a sea change in the way that the insurance is sold. The majority of the policies are sold alongside a loan, credit card or mortgage with advisers rewarded handsomely for pushing PPI, taking up to 80 per cent of the first year's premiums as commission.

Under the Competition Commission's proposals, the loan provider will be prohibited from contacting a customer about PPI for 14 days. The customer, though, will be able to call the provider within 24 hours of getting a loan if they wanted PPI from that company.

The Commission wants a ban on single premium policies that trap people into poor value products that are difficult to get out of.

It has suggested that consumers be offered a "personal PPI quote" that clearly states the cost of taking out the insurance. It also called on providers to make advertising clearer, to give information to the FSA for a comparison table and an annual report for customers to help them decide whether to switch.

The Competition Commission is inviting feedback on the proposals until December 4 and will publish its final report in January 2009.

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