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By Emma Tyrrell

When you think of protection rackets, you might think of Tony Soprano wielding a baseball bat, but probably not a sober-suited bank manager or loan adviser wielding a pen.

But a damning report out this week, called "Protection Racket", looks at the high-pressure sale of pricey, and often useless, payment protection insurance (PPI). The policies, usually sold alongside loans, credit cards, and hire purchase agreements, are described by the lenders that flog them as "peace of mind", as "reassurance", as a valuable safety net allowing you to cover debt payments if you lose your job or become too ill to work. Don't they sound too simply marvellous?

But to many people PPI has brought stress, suicidal thoughts, massive expense and deepening debts.

OK, so "protection racket" is a cunning little play on words. No-one is suggesting that lenders are defrauding their customers with threats of violence, like some two-bit mafiosi. But what they are doing is making buckets of cash by potentially mis-selling expensive payment protection insurance to people who cannot claim on it, cannot afford it, or don't want it.

The report - from the Citizens Advice Bureau - details case after depressing case of PPI problems.

There's the man who took out a consolidation loan of £14,575 to cover his overdraft and credit card debts. He was told that he had to take out "optional" payment protection insurance for a whopping additional premium of £7,700 if he wanted the loan approved. With this additional burden added to the loan, plus the interest on both parts, he ended up owing over £32,000 - more than double his original debt.

Unfortunately the CAB report doesn't name the banks, loan and credit companies in the cases they cite, but I'd just love to know what twisted little soul thought the solution to this man's debt problems was to pile him up with more. They should be ashamed, whoever they are.

Then there's the woman with credit card debts of £3,140, who tried to claim on her card payment protection insurance, but found that she had to continue paying the PPI premiums of £22.52 a month while she was claiming. With interest, charges and PPI premiums the minimum payment on her account was £105.53 a month. The expensive insurance she had been paying for would only fork out £105.20 a month, so the PPI premiums were helping to slowly increase her debt.

The stories are enough to make you weep. There are people who were sold policies which salesmen knew they were not eligible to claim on. There are others who were told they could claim for ill-health, but only by forking out £25 a month for a private doctor's sick-note. Then there are the people who found out to their cost that their insurance didn't cover all their debt repayments, but merely a small proportion of them. And there are those who insisted they didn't want or need the insurance, but found their wishes were ignored and that they were being charged hefty fines for not paying for it.

Although the insurance industry insists that 85 per cent of PPI claims are met, CAB experience is that 85 per cent are turned down. The people who use citizens advice bureaux are more likely to be on low, unstable incomes and to have health problems - in other words the very people who are most likely to need to claim on payment protection insurance. This costly cover is failing those who need it most.

Giving up work due to mental health problems such as stress or depression are commonly excluded, as are back problems, or any pre-existing medical condition. Those who leave work to care for a sick relative are also unlikely to be covered, as are the self-employed or casual workers, and anyone over 60 when they took out the policy.

The CAB says the list of common exclusions rules out so many everyday situations that every policy that excludes these is "arguably a mis-sale."

There's the man who took out a £19,000 loan with a high street bank. He was sold payment protection insurance for a hefty premium of £3,500, even though he was on income support and registered blind, and would consequently never be able to claim on it.

Another woman told bank staff of her mental health problems, which had prevented her from working for six years. Even though she provided details showing she was on income support and disability living allowance, they went ahead and sold her a PPI policy. When she later tried to claim she was turned down because of - you guessed it - the mental health problems which the bank had known about from the start.

Yet another man was turned down when he tried to claim because the insurance company said the policy did not cover casual workers. Yet as part of the loan application he had had to send in his contract of employment, which clearly stated he was a casual worker.

The list goes on.

You'd think that after the pensions mis-selling scandal, the endowment mis-selling debacle and others, the financial services industry would have learnt their lesson. But no - it seems to stumble from one dodgy money making scheme to the next.

When stakeholder pensions were introduced, forcing down the charges (and therefore the profits) on pensions generally, there was much weeping and wailing and gnashing of teeth from the industry, but then the stoical realisation that "protection" was the next big thing. And boy, has that been the truth.

Credit and insurance companies are raking in premiums of approximately £5.3 billion a year, but it is reckoned that the PPI premiums we pay are around three times the amount it costs the companies to provide them. The CAB says that borrowers could be being overcharged by as much as £3 billion a year as a result.

It looked at PPI policies offered by six credit card companies and found that someone with a £1,000 balance could be spending £86 to £95 a year to insure their payments (the equivalent of adding between 8.5 and 9.5 percent a year to the interest rate). But only one policy appeared to guarantee that the insurance would pay off the credit balance if it was needed. The worst, costing £86 a year for a £1,000 balance, would provide a debt reduction of as little as £12 over a similar period.

This is partly because when people make a claim on credit card PPI policies they are generally required to carry on paying the premiums. The benefit provided can be so little in comparison to the premiums forked out over the years, as to be worse than useless.

One major problem is that most people don't realise that there are cheaper alternatives available. What they are after is the loan, or the credit card - the insurance is a secondary sale to a captive audience. But you don't have to take the pricey insurance offered on each of your loans, credit cards, and credit agreements. You can instead shop around for your own separate Accident, Sickness and Unemployment insurance (ASU) to cover all your monthly debt repayments. It's still expensive, but you can shop around. The cheaper policies can cost under £4 a month to cover £100 a month of debt repayments.

Alternatively you can take out income protection insurance, which will actually replace your income if you are unable to work due to accident, illness or job loss. Again it is pricey, and again there will be exclusions, but the point is, there is a choice. You don't have to settle for the one single policy your credit company has on offer.

The CAB has made a "super-complaint" about PPI sales to the Office of Fair Trading. It wants the OFT, city watchdog the Financial Services Authority, and the Treasury Select Committee to investigate the market.

It wants a baseline standard of acceptable PPI cover to be established, along with a standard stakeholder PPI product, with many common exclusions cut out. Plus it wants lenders to be required to allow borrowers the option of paying PPI by monthly instalments rather than one-off premium. This is only allowed on credit cards and mortgage payment protection insurance at the moment.

Instead most loan and hire purchase-linked policies add a hefty lump sum to the original loan. Borrowers have to pay interest and charges on this amount too, increasing their indebtedness and meaning that if they want to settle the loan early the insurance policy does not simply end, as it would with a monthly paid premium, but is added to early settlement costs.

It's all such a miserable, wretched state of affairs, and it makes me sick that such vulnerable people are being preyed on by a load of money-grubbing salesmen.

They are selling peace of mind and reassurance, but many people have found they have bought the opposite. The insurance is unnecessary for some, but those who need it most are being failed the worst.