The Financial Services Authority (FSA) is investigating a claim that syndicates in the Company Market are recording legal expenses underwriting deals incorrectly.

It is believed that Royal & Sunalliance, Allianz Cornhill, AIG Europe and Europ Assistance Insurance were wrongly categorising deals three months ago.

QBE, Inter Partner Assistance and Independent Insurance are also being inspected.

Legal expenses and After the Event (ATE) policies should be logged under the Class 17 legal expenses insurance that was introduced in the 1970s.

But the FSA received a letter last October saying some underwriters may be coding them in Class 16, which is for "miscellaneous financial loss", or Class 15, which is for "suretyship", against risk of loss from the person insured.

A spokesman said syndicates must apply to the FSA to gain the authority to write in certain areas of insurance.

"If they wrote business they were not authorised for, then they would be in trouble," he said. "The offence would result in a range of sanctions ranging from a warning to prosecution. We could also get an injunction to de-authorise them from writing that business."

Sarah Forsyth, supervisor of the Insurance and Friendly Societies Division of the FSA who received the letter said the matter is still being "looked into".

Royal & Sunalliance, Allianz Cornhill, Inter Partner Assistance and QBE have said they are authorised to write under Class 17. The remaining syndicates were unavailable for comment.