Selling loan insurance alongside credit should be banned, the Competition Commission said last week — in a move that was broadly welcomed by consumer groups but could see the cost of borrowing soar.

The commission wants to tackle the “point-of-sale advantage” by banning providers from selling controversial payment protection insurance (PPI) to customers within 14 days of selling them credit, unless the customer specifically asks for it.

PPI has long been criticised as agressively sold and expensive, and the Financial Services Authority recently fined Alliance & Leicester a record £7m for PPI failings.

Peter Vicary-Smith, chief executive of consumer group Which?, said: “This is a huge victory for consumers who have often felt pressured into buying expensive and inadequate PPI products.”

However, the Association of British Insurers warned the proposals could potentially “kill the PPI market” and leave millions of consumers unprotected.

Eric Leenders, director of retail at the British Bankers’ Association, said it could lead to lenders raising the cost of personal loans and mortgages.

“That’s an option — or alternative products might come to the fore,” he said.

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