Banks 'grabbing an 80pc share in loans protection racket'

Consumers paid £4.4billion in premiums on Payment Protection Insurance (PPI) last year, the watchdog said, with the bulk of it hoovered up by banks, building societies and other finance companies.

The commission is taking the unusual step of using its legal powers to force the industry to open up its books, accusing banks of being too slow to reveal how much they are making from this loan "protection racket".

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Sales of PPI are being investigated by the commission, the Office of Fair Trading and the Financial Services Authority amid claims of rip-offs and mis-selling on a huge scale.

PPI is sold to offer peace of mind to those taking out loans or using credit cards, guaranteeing repayments in case of sickness or unemployment.

However, the cost of the policies sold by banks, retailers and garages can be up to five times higher than similar cover from an insurance firm or the Post Office.

Some are offered a policy even if they are not eligible, which means they get nothing when they fall on hard times.

The watchdog said: "We have found typical commission rates of 50 to 80 per cent on personal loan PPI and credit card PPI, and around 40 to 65 per cent on mortgage PPI." The gravy train does not end there. Banks also take 90 per cent of any profits when claims on PPI policies are lower than expected.

Acting Liberal Democrat leader Vince Cable said: "The principle of PPI is a good one but it has been turned into a cash cow by greedy banks abusing a deeply uncompetitive market. Many consumers are being ripped off."

Citizens Advice said: "Every day CAB deal with more than 6,500 new debt problems and it is scandalous that insurance policies, which should be designed to prevent debt, are in many cases increasing people's debt."

Lloyds-TSB sells more PPI policies than any other company, followed by Halifax-BoS, Barclays, RBS-Natwest, card company MBNA and Abbey.

Consumers often feel under pressure to buy PPI to qualify for credit. But the commission found evidence of "prices being higher than competitive levels when PPI is sold alongside a credit product".

PPI policies sold by banks are massively more expensive than stand alone cover sold by independent insurance companies.

The commission pointed to research by consumer group Which?. To cover a five-year £7,500 unsecured personal loan, premiums on the most expensive PPI policy worked out at £3,000 - a mark-up of 171 per cent on the cheapest option.

Investigators have found widespread evidence of PPI misselling. That led the Financial Services Authority to fine GE Capital Bank, which offers store cards for the likes of Topshop and Laura Ashley, £610,000 earlier this year. Other fines have been imposed on Capital One and Home and County Mortgages Ltd.

The British Bankers Association denied its members were dragging their feet in providing information to the commission.

A spokesman said: "Our members are fully co-operating. In some cases there may have been a delay if information is complex and not readily available."

The commission's provisional findings are due in May. It may ban banks from selling PPI.