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

The Competition Commission today disclosed that the market for the insurance, which protects credit repayments if the holder is unable to work or loses their job, was failing to work competitively, leaving distributors able to charge higher prices.

The watchdog is now calling for consumers to be given better information on PPI, which is typically sold alongside a loan or credit card, so that they understand what they are buying and how much it costs relative to the credit agreement they are taking out.

It is also proposing a series of measures to make it easier for consumers to switch between PPI providers, including 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.

But the CC warned that it was considering banning the cover from being sold alongside credit agreements altogether, while it may also introduce a price cap as a temporary measure to reduce the cost of insurance.

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 CC further revealed that the vast majority of the UK's 14million 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.

It says many people were also 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.