The Competition Commission has banned the sale of payment protection insurance (PPI) alongside credit.

The watchdog has banned the insurance, which covers repayments on loans in the event the customer cannot work, on concerns over the way it is sold.

Lenders will also no longer be able to sell single-premium policies – a way of tacking on the cost of the cover onto the loan, which was condemned by consumer groups as a rip off.

However, they will still be able to offer customers the option of taking out the policy, seven days after the loan has been agreed, while consumers who want the product can contact the lender 24 hours later.

Customers will also get annual statements reminding them of the cost of the product, which will help them if they want to look for a better deal, and credit providers have to give consumers a personal PPI quote which states the cost of the insurance on its own and when added to the credit product.

Peter Davis, inquiry chairman and Competition Commission (CC) deputy chairman, said: “This will open up the market, giving consumers time to search the market once they have secured their credit, and giving competing providers, who at the moment struggle to get a look in, the opportunity to offer their PPI products to these consumers.

“The increased economic uncertainty makes it even more important that consumers have choices, that they have the opportunity to make the right choice and they can get value for money.”

Consumer groups welcomed the decision. Louise Hanson, head of campaigns at Which?, said: “This decision helps sound the death knell for PPI. For too long, too many consumers have suffered from shoddy, expensive and inadequate protection.

“We’re finally seeing the light at the end of this very long tunnel but it’s now time for the industry to develop useful products that consumers actually need to protect their finances.”

However, insurers warned the action could harm consumers. Nick Starling, the ABI’s director of general insurance and health, said: “The ABI supports any measures that help people make an informed choice – for example, the remedies for clearer, more timely information about the cost of PPI and the product features.

“However, the ABI believes that the point of sale ban carries significant risks for borrowers, mainly by leaving them unprotected at a time when unemployment cover has never been needed more.”

Figures released yesterday by the ABI show that in November 2008 there were 19,105 new unemployment claims on PPI policies, an increase of 118 per cent from 8,772 in November the previous year.

“This massive leap in claims shows that PPI is helping many people through a difficult financial period,” Mr Starling said.

According to the CC, the “vast majority” of the UK’s more than 12 million PPI policies are sold at the same time people take out a loan or a credit card.

But most of these customers are not aware they can buy this cover elsewhere, at cheaper rates, leading to little or no competition in the industry.