The FSA has called on firms to take urgent action to ensure that their selling practices for PPI are in line with regulatory requirements.
The announcement follows a programme of visits and mystery shopping that uncovered poor selling practices and a lack of proper compliance controls among a sample of firms.
The firms that sell PPI and the insurers who provide the policies will be receiving detailed feedback on the FSA's findings and will need to address any problems raised.
Some more serious cases will be referred for further investigation with a view to possible enforcement action.
Having put the industry on notice to improve its sales practices, the FSA plans to undertake a second round of thematic work early next financial year to check that compliance levels have improved.
It will also be meeting with the relevant trade associations to seek their commitment to changing and improving the market.
Clive Briault, FSA managing director for retail markets, said: "When properly structured, explained and sold, payment protection insurance can provide worthwhile cover for consumers against unexpected changes in their personal circumstances. We were therefore pleased to see that sales of regular premium PPI sold with prime mortgages are generally compliant.
"However, compliance standards in other areas of the market, notably single premium PPI business, are generally weak. Those firms where these problems exist must take urgent action to address them.
"This poses a serious risk to consumers because of the poor disclosure of product and price details; the possibility that consumers may not be eligible to claim against their policies; and the fact that consumers may not be aware that they may receive little money back if they cancel these policies early."
The FSA identified the sale of PPI with credit arrangements as a priority ahead of taking on responsibility for general insurance regulation in January this year. After allowing some time for firms to become familiar with its rules, this summer it carried out a series of supervisory visits to firms and mystery shopping to assess compliance.
Of the 45 firms examined, 30 were selling PPI with revolving credit (credit and store cards and catalogues), unsecured loans and sub-prime mortgages and secured loans.
Among these 30 firms, the FSA found that there was a risk of inappropriate sales, there were inadequate controls in place for non-advised sales and advice on PPI was often likely to be poor.
It also found that there was an over-reliance on product documentation given to the customer at the expense of explaining the policy to the customer orally and the quality and timeliness of product and price disclosure by some firms selling single premium policies was poor.
The FSA also found that the level and structure of inducements and targets for sales staff could encourage mis-selling in some firms.
It said that training and competence of sales staff was not adequate in around half of firms and that compliance monitoring was variable and in some cases very poor.