Nov. 13 (Bloomberg) -- Barclays Plc, Lloyds TSB Group Plc and other U.K. banks that offer payment protection insurance should be prevented from selling the product at the same time as the underlying loan, a British antitrust regulator said.

The Competition Commission refrained from recommending a ban or price cap on so-called PPI, which generates annual revenue of 5.5. billion pounds ($8.2 billion) for banks, following a 21- month investigation. The regulator instead proposed in a report today that customers be given personalized quotes, and that lenders and retailers be banned from grouping PPI with the underlying loan to give customers a single premium to pay.

The ban on selling PPI with a loan ``is devastating news for borrowers,'' the Association of British Insurers, a trade association with 400 members, said in a statement. ``A ban would mean that borrowers will be unable to take out the protection they need in a straightforward manner, in the very economic circumstances when they are likely to need it the most.''

The regulator found in June that U.K. lenders overcharge customers by as much as 1.4 billion pounds a year for PPI, which is used to cover loan repayments in case of illness or unemployment. Since the report, the financial industry has been roiled by the credit crunch and subsequent government bailouts.

PPI has come under increasing scrutiny from U.K. regulators. The Financial Services Authority issued a record 7 million-fine to Alliance & Leicester Plc last month for improper sales of payment insurance.

14-Day Window

``The vast majority of the UK's more than 13 million PPI policies are sold at the same time as a consumer takes out a loan or other type of credit and the CC found that many consumers are unaware that they can buy PPI from other providers,'' the Competition Commission said today.

The regulator proposed banks wait 14 days after the sale of a mortgage or loan before contacting the customer about buying PPI. Customers would be free to contact any lender about the insurance in that time.

Banks and insurers can submit replies to today's proposals by the Competition Commission until Dec. 4.

``The Competition Commission is simply wrong,'' the British Bankers' Association, a trade group, said today. ``It is totally without conscience to encourage people to borrow without back- up.''

As many as 2 million customers have been improperly sold PPI, consumer-advocacy group Which? Ltd. said in May. Customers may not be informed that the insurance is added to the cost of the loan on which they pay interest, the group said. Today's proposals would stop combined payments for both products.

`Dumb' Ban

The regulator also proposed that lenders and retailers state clearly in advertisements that PPI is voluntary and how much it costs every month.

``They've probably gone as far as they could have practically done,'' said Mike Pullen, head of antitrust and trade at DLA Piper in London. He is advising one of the lenders in the inquiry. ``The ban on single premiums is really dumb in this economy: yes, everything is paid for upfront, but with the alternative of monthly contracts, prices can go up.''

The Office of Fair Trading first referred the PPI market to the Competition Commission, which undertakes in-depth antitrust investigations, in February 2007. The OFT found that only 20 percent of the money collected from PPI premiums is ever paid out in claims. Car insurance policies typically pay out 82 percent of claims, according to Which.

To contact the reporters on this story: Caroline Binham in London at cbinham@bloomberg.net.

Last Updated: November 13, 2008 07:43 EST