PPI sales have proved controversial and prompted investigations
Banks and other lenders should stop selling controversial and lucrative single premium loan insurance from Friday, the City watchdog says.
Single premium Payment Protection Insurance (PPI) will be banned officially from October 2010.
But the Financial Services Authority (FSA) called on all firms to stop selling the insurance now because of "ongoing concerns" with sales.
PPI is supposed to repay borrowers' loans if they fall ill or lose a job.
There are currently more than 12 million PPI polices in force, which have mainly been sold alongside credit cards, personal loans and mortgages.
Single premium PPI policies involve the full premium being added to a loan up-front, thus inflating the borrower's interest bill.
The FSA's managing director of retail markets, Jon Pain, wrote to chief executives asking them to stop selling single premium PPI with unsecured personal loans as soon as possible and by 29 May at the latest.
"No firms will be selling single premium PPI on unsecured personal loans from today following FSA intervention and action with the industry," said a FSA spokesman.
The extent of the problem was revealed earlier in the week in the annual report of the Financial Ombudsman Service.
It revealed that in 2008-09, complaints about PPI nearly tripled compared with the previous year, to just over 31,000. Some 89% of all the resolved PPI cases were found in favour of the customer.
The sale of PPI has been highly profitable, partly because so few customers have been able to make valid claims.
The Commission found that in 2006, lenders made excess profits of £1.4bn when selling the insurance.
Consumer organisations have found that borrowers are often also under the impression that taking the insurance is essential in order to be granted the loan at all.
And some customers have been misled about what the insurance covers, whether they really need it, or if they will even be able to make a claim under the terms of their policy.
Investigations into mis-selling of PPI have prompted a series of heavy fines being handed out.
In October 2008, the FSA fined the Alliance & Leicester £7m for mis-selling PPI to 210,000 people. The FSA said the bank had trained its staff to pressurise any customers who disputed the inclusion of the supposedly optional insurance in the quotation for their loan.