A victory was declared for consumers yesterday as payment protection insurance (PPI) was banned from being sold alongside credit cards and personal loans.

A two-year investigation by the Competition Commission concluded that lenders have an unfair advantage selling PPI with credit products, resulting in an uncompetitive market where consumers are overcharged.

The Commission ordered that from 2010, banks and retailers making a loan or credit offer must wait a week before they can sell PPI to the borrower.

Single-premium PPI – when the cost of the insurance is added to the debt so that borrows repay interest on both – is also being prohibited.

Peter Davis of the Competition Commission said: “The ‘point-of-sale’ advantage has meant that leading providers have faced little competition for PPI and, as a result, have charged persistently high prices. Allowing the current short­comings to continue unchecked would be damaging to consumers.”

The Commission hopes the seven-day cooling off period will encourage consumers to shop around for the best deal. The Commission also ordered lenders to provide personal PPI quotes and annual statements to customers.

The decision was hailed as a victory by consumer groups but criticised by the British Bankers Association, which said it could leave consumers without adequate cover.

Payment protection insurance (PPI) covers repayments on credit products if the borrower becomes unable to pay because of accident, sickness or unemployment. Campaigners say the insurance is overpriced, riddled with exclusions and frequently mis-sold to customers who would never be able to make a claim.

Louise Hanson of Which?, the consumer group, said: “For too long too many consumers have suffered from shoddy, expensive and inadequate protection. It’s a great shame that since we began campaigning for better products, many people have wasted millions of pounds on PPI.”

However, a spokesman for the British Bankers Association said that loan cover was more important than ever for consumers during the economic downturn: “As two million people approach unemployment it is totally without conscience to encourage people to borrow without back up.

“The Competition Commission has gone well beyond its remit. This is an irresponsible decision exposing vulnerable customers to economic difficulty when they may need help most.”

The Financial Services Authority, the City watchdog, has already taken action against 19 firms over PPI mis-selling since September 2006, including Egg, Capital One and Alliance & Leicester, mainly for selling the product aggressively or without explaining the costs and exclusions to customers.

Adding PPI to a £7,500 five-year loan could cost an additional £2,000 to £3,000, according to Which?, but many people – including those who are self-employed or aged over 65 – may be unable to claim. In one example, a couple applied for a £56,000 loan from The Funding Corporation and were persuaded to take out a PPI policy at a cost of £22,568.

Thousands of PPI policy holders have already reclaimed the costs of their insurance on the basis that they were mis-sold their policy. Martin Lewis of MoneySavingExpert.com said: “So far, 440,000 PPI free reclaiming template letters have been downloaded from our site, and every day scores more people report getting back £1,000s.

“This must carry on; the Commission’s report strengthens the weight of reclaimers call – and everyone who’s ever bought one of these policies should check it to see if they’re due their cash back."

PPI has become a highly lucrative industry and the Commission’s orders could not have come at a worse time for banks and retailers struggling in the economic downturn. In 2006 alone, lenders made profits of £1.4 billion selling loan cover – and now experts warn banks will recoup any loss of profit from elsewhere.

Andrew Hagger of Moneynet.co.uk, the comparison website, said: “The last thing lenders need is to lose a lucrative PPI income stream. Some of the profit lost from PPI sales may be reclaimed in the form of higher interest rates being charged on loans and credit cards.”

The Association of British Insurers (ABI) said there has been a sharp increase in the number of people claiming on their PPI policy in recent months. In November 2008 19,105 new unemployment claims were made, an increase of 118 per cent from 8,772 in November the previous year – although the ABI was unable to say how many claims resulted in pay-outs.

Nick Starling of the ABI said: “The point of sale ban carries significant risks for borrowers, mainly by leaving them unprotected at a time when unemployment cover has never been needed more. The recent leap in claims shows PPI is helping many people through a difficult financial period.”

Mr. Davis of the Competition Commission added: “We recognise that these are significant interventions in this market. However, it is necessary to enable consumers to benefit from lower prices and better choice.”

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