Plans to restrict the sale of the controversial payment protection insurance (PPI) look set to go ahead.
The Competition Commission wants to ban PPI being sold at the time loans are granted.
It said customers would benefit from being given time to find more appropriate and better-value cover.
PPI is supposed to enable borrowers to pay off loans such as credit card bills or mortgages if they fall ill or lose their job.
The commission's decision is still provisional and open to final consultation - with a final verdict to be published in July.
Plans to restrict PPI sales were first released in January last year.
However, after an objection by Barclays, the Competition Appeal Tribunal asked the commission to review the plans - especially whether they would inconvenience customers who could not buy PPI at the same time as taking out a loan.
Its further study found that "many customers would place very significant value on being given the time and space to choose the right PPI product - or indeed to decide that PPI is not right for them", said commission deputy chairman, Peter Davis.
A "significant" number of customers appreciated the convenience of buying PPI at the point of sale of credit, he added.
"Overall we concluded that PPI providers are overstating the loss of convenience that would result from the introduction of a prohibition on selling PPI during the credit sale."
Under the commission's proposals, the ban would not apply to protection taken out on repayments for shopping through home catalogues, which makes up about 2.5% of the PPI market.
Barclays, whose complaint was supported by Lloyds Banking Group and Shop Direct Group Financial Services Ltd, said it was disappointed with the Commission's decision.
"We know that PPI is a product that is of value to many people. In these times of economic uncertainty, adequate financial protection is more important than ever," a Barclays spokeswoman said.
"We still maintain that to prohibit PPI being sold at the point of credit sale and for a fixed period afterwards will limit, rather than enhance, customer options and will result in customers being exposed as unprotected."
Consumer organisations have complained for some years about people being mis-sold PPI polices.
Actions already taken by authorities include:
- In October last year, mortgage lenders and insurers agreed to refund £60m to customers whose premiums for mortgage payment protection insurance went up in 2009
- In September 2009, the Financial Services Authority (FSA) told banks and other lenders to compensate customers who may have been mis-sold payment protection insurance when selling "single-premium" PPI policies alongside unsecured personal loans
- At the same time, all financial firms were told to reopen 185,000 old complaints about PPI they had previously dismissed
- In May last year, the FSA told the banks, and other lenders who sell PPI, to immediately stop selling one version of the insurance, called single premium PPI, where the premiums are added onto the loan as an upfront lump sum.
The sale of PPI has been called a "protection racket" by consumer groups, as the policies can be very expensive and have been mis-sold to people who could never make a valid claim under the terms of their policies.
As part of its initial inquiries which led to the proposed ban, the Competition Commission found that in 2006, lenders made excess profits of £1.4bn when selling the insurance.
It found that the vast majority of the UK's 12 million PPI policies were sold at the same time as a consumer took out a loan, credit card or other type of credit.
Many consumers were unaware that they could buy PPI from other providers, rarely shopped around to compare prices and terms and conditions of PPI policies, and rarely switched PPI providers.
Peter Vicary-Smith, chief executive of the consumers' association Which?, said: "People need to protect their finances but PPI has been widely discredited because of its expense and the poor cover it offers.
"The industry should now concentrate its efforts on developing protection products that offer better cover and value for money to its customers."