Payment protection insurance (PPI) should not be sold to a customer at the same time as a loan, the Competition Commission says. It recommends a 14-day delay, to allow customers to shop around.

PPI is designed to enable people to repay loans, such as mortgages or credit card bills, even if they lose their job or fall ill and their income drops. But PPI has been mis-sold in the past, and the Commission estimates that £1.4bn of "excess profit" was made in 2006 by the 12 largest sellers.

The Commission said that most of the 13 million-plus PPI policies in Britain were sold at the same time as a consumer took out a loan or other credit from a bank, mortgage lender or credit card company, and sometimes they were not aware that they were buying it, or that they could buy it elsewhere.

Consumer groups have described PPI as little more than a "protection racket".

The Commission wants the cost of taking out the insurance to be made clear to the customer, and calls for a ban on "single premium" policies, which stop customers from switching by adding PPI to the total debt.

It also wants the Financial Services Authority (FSA) to compile a comparison table and an annual report for customers, to help them to decide whether to switch.

These proposals have caused uproar among PPI providers.
 
"Preventing customers from buying PPI when they take out new credit will mean that many vulnerable people go unprotected just when unemployment is rising sharply," said Stephen Sklaroff, director general of the Finance and Leasing Association.

He also said that the loss of single-premium PPI would result in worse terms for many customers.

His comments were echoed by the Association of British Insurers (ABI), which said the proposed 14-day ban would leave "millions of consumers unprotected" and was “devastating news” for borrowers.

“With a 69% increase in recently unemployed customers claiming on their PPI, news of today’s ban will result in significant financial hardship for many individuals and their families,” the ABI said.

"The Competition Commission has got this completely wrong," was the view of the ABI’s Nick Starling, Director of General Insurance and Health.

The British Bankers' Association agreed, saying “it is totally without conscience to encourage people to borrow without back-up.”

But Which? welcomed the Commission's report. It said it had evidence that up to two million people had bought PPI in haste, only to find that they could not claim on the policy because of exclusions in the small print.

The Financial Ombudsman recently called on the FSA to stop banks brushing aside complaints from customers about PPI mis-selling.
 
The FSA does seem to be prepared to take a tougher line on sales of PPI. Earlier this year, the FSA fined Alliance & Leicester £7 million for putting pressure on customers to buy PPI policies that they did not want or need.

The Competition Commission is putting its proposals out for consultations, and will produce a final report in January. 

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