The FSA has warned firms in the payment protection insurance (PPI) market that they must improve standards or face fines.
The ultimatum follows a review of PPI in which the regulator's mystery shoppers uncovered "poor selling practices and a lack of proper compliance controls".
FSA managing director for retail markets Clive Briault highlighted compliance standards in the single premium PPI business as "generally weak." He said: "Those firms where these problems exist must take urgent action."
Problems included risks of inappropriate sales, inadequate controls for non-advised sales and inadequate information on policy exclusions.
Law firm Reynolds Porter Chamberlain said the PPI market could become the first general insurance mis-selling scandal.
Meanwhile, the OFT is due to respond to a complaint on the PPI market next month.