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Banks are planning to increase the cost of personal loans due to a sweeping crackdown to be exposed on Thursday by the competition watchdog on the huge profits it claims the lenders make on their insurance products.The Competition Commission sets to impose severe limits on the £5.5bn market for sickness and unemployment insurance that banks sell to personal loans customers stated by people familiar with the case.The increases in price likely to be imposed by banks in reprisal come as the commission sets to limit up to £1.4bn of excess profits it says the industry earns via sales of the loan cover, which is called by payment protection insurance.

Bankers reveal that the industry is bound to raise the price of loans if institutions are no longer permitted to subsidize the rates they charge to customers with profits earned from payment protection insurance.

Michelle Slade, analyst at Moneyfacts.co.uk, a financial website stated that “In recent year’s part of the reason why rates have been so low is because PPI was cross subsidizing the rate charged to customers.”

The watchdog’s 21-month probe comes after the Office of Fair Trading revealed that last year the banks were damaging the interest of their customer by putting cheap loans with costly insurance policies.

The commission suggested the banks to stop selling insurance at the same time as loans, instead forcing them to postpone for a week or more to give customers an opportunity to shop around.

The commission has conducted extra consultation with the banking industry over the past month, but people known with the investigation say this has not led to significant changes. The watchdog of the commission’s say there is no need to go easier on the banks because of the monetary crunch, as institutions’ troubles are related to money supply rather than profitability.

Banking industry insiders pointed out that they will oppose the harshness of the crackdown, although some privately agrees to a degree of change is unavoidable.