Consumers are being overcharged for Payment Protection Insurance by £1.4 billion a year due to a lack of competition in the market, the competition watchdog said today.

Consumers are being overcharged for Payment Protection Insurance by £1.4 billion a year due to a lack of competition in the market, the competition watchdog said today.

The Competition Commission (CC) blamed the situation on the way the controversial product, which covers debt repayments if the holder is unable to work or loses their job, was typically sold alongside credit agreements.

It warned that it was considering banning the sale of PPI alongside mortgages, loans and credit cards, adding that it may also introduce a price cap as a temporary measure to reduce the cost of the policies.

The watchdog also wants to see consumers given better information on PPI to ensure they understand the product and to encourage them to shop around for the best deal, as well as measures to make it easier to switch between providers.

Inquiry chairman and CC deputy chairman Peter Davis said: "We've found serious problems with the PPI market and consumers are paying for the lack of competition.

"The way PPI is sold as an 'add-on' to a loan or other credit product means distributors escape the pressure they should face from competing suppliers.

"Distributors don't appear to compete much with each other on either price or quality of PPI, neither do they appear to do much direct advertising of PPI to win customers from each other."

The Commission said the vast majority of the UK's 14 million PPI policyholders were sold the cover at the same time as they took out a credit agreement and made a snap decision on whether to purchase it without considering its true cost.

Many people were unaware they could buy PPI from other providers and they rarely shopped around, while comparing prices was difficult due to the complexity of the product.

There is also a belief among consumers that buying PPI increases their chance of getting a loan, and the cover is often bundled up into a credit agreement, making it difficult for other providers to gain a foothold in the market.

The Commission also found evidence that the high price of PPI was being used to cross-subsidise the interest rates on personal loans offered by some providers.

The watchdog is calling for consumers buying PPI to be given clear details on the cost of the product and to be told they could get the cover from other providers, with it also made clear that taking out PPI does not make it more likely that they will be offered a loan.

It also wants a standard format for calculating price to be used to make it easier for people to shop around.

Other measures it is considering include requiring policies to be renewed annually to make it easier for consumers to switch provider, and giving customers annual statements setting out the cost of their cover and reminding them that they can cancel it.

It is also proposing banning the sale of so-called single premium policies, in which the cost for the entire term of the policy is paid up front and usually added to the debt being taken out.

The report, which follows a 16-month investigation, was welcomed by consumer groups which have long campaigned about PPI.

Doug Taylor, personal finance campaigns manager at Which?, said: "PPI is generally a bad product, inappropriately sold.

"We've been saying it for 10 years and we're delighted that we've been vindicated. Our research shows that in the last five years, up to two million policies have been mis-sold."

Teresa Perchard, director of policy at Citizens Advice, said: "We very much welcome today's report published by the Competition Commission which confirms what we said in our 'super-complaint' that triggered the original investigation."

But trade bodies for banks and insurers warned that the Commission's proposals risked destroying the PPI market, leaving consumers under-insured at a time when the economy was facing a downturn.

They added that during the past two years the industry had made changes to the product, including making more information available to consumers to help them shop around and compare products, and these improvements needed to be taken into account.

Nick Starling, the Association of British Insurers' director of general insurance and health, said: "We are very concerned that the Competition Commission's proposed remedies could destroy this market, particularly while we are facing a period of economic uncertainty."

Angela Knight, chief executive of the British Bankers' Association, added: "The report and discussion document provide some useful food for thought but if some of the recommendations are adopted, it could leave customers exposed just as economic conditions are worsening."