British 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 made the disclosure today adding 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 CC also 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.

According to CC, there is also a belief among consumers that buying PPI increases their chance of getting a loan, and the cover is also often bundled up into a credit agreement, making it difficult for other providers to gain a foothold in the market.

The watchdog says that distributors and intermediaries are not seeking to win customers through either the price or quality of their products.

It 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 added that there was evidence indicating that the high price of PPI was being used to cross-subsidise the interest rates on personal loans offered by some providers.

However, in order to tackle the problems, the watchdog is calling for a standard disclosure on advertising and marketing material about the cost of taking out PPI.

It is also proposing the introduction of a statement of key messages telling consumers they could get the cover from other providers, directing them to sources of comparative information and making clear that taking out PPI does not make it more likely that they will be offered a loan.

The watchdog has also advocated that a standard format for calculating price should also be used to make it easier for people to shop around.

Other measures it is considering include requiring policies to be renewed annually to make it easier for consumers to switch, and giving customers annual statements setting out the cost of their cover and reminding them that they can cancel it.

Around 6.5million new PPI policies are taken out each year, generating around £5billion in premium income.

But the cover has come in for increasing criticism in recent years; after it emerged many consumers had been mis-sold policies they would never be able to claim on.

Research carried out by Citizens Advice found that 85% of its clients who had tried to claim on one of the policies had been unsuccessful, despite the industry claiming that just 15% of claims are turned down.

Today's report by the CC follows a 16-month investigation into the PPI market following a referral from the Office of Fair Trading.

The OFT investigation was triggered by a super-complaint from Citizens Advice about the cover.