The Competition Commission has warned that consumers who purchase Payment Protection Insurance (PPI) while taking out loans are being overcharged by £1.4 billion a year.

The overcharge, it said, occurs because there is lack of competition as PPI are often sold along with the protected loans.

Firms may, as such, be banned from selling PPI policies to customers when they take out loans, the commission further warned.

PPI is cover for loan repayments in case one is unable to continue payment due to illness or loss of employment.

However, the commission said it would consider imposing temporary price cap on the policies pending when the prices are forced to come down by competition.

The commission’s deputy chairman, Peter Davis, explained that there were serious problems with the sale of PPI cover and that the absence of competition among providers was helping price hike.

He said the way PPI is sold as an add-on to a loan or other credit product was helping distributors evade pressure 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,” he said Following a directive from the Office of Fair Trading (OFT) the competition commission has been investigating PPI.

Based on the findings that the level of cover customers enjoyed was often less than they expected, the OFT concluded that PPI was a poor deal. And it responded to complaints first lodged in 2005.

But the British Bankers Association disagreed with the assertion that the cost of PPI policies was too expensive.