The Financial Services Authority (FSA) had been in "close touch" with Independent Insurance in the period before its provisional liquidation, Economic Secretary Ruth Kelly told the House of Commons yesterday.
Kelly was responding to questions by Barry Gardiner MP on the role of the FSA in monitoring the failed insurer.
He urged the government to set up a separate investigation into the authority's part in the fiasco.
He also criticised the FSA's reliance on company management to provide solvency information.
"Can it really be that we pay £232m each year to run the FSA for them to rely on auditors appointed and paid by the companies the FSA is supposed to be monitoring?" Gardiner asked.
However, Kelly refused to comment on FSA's role while the Serious Fraud Office was still conducting an investigation into the collapse.
"What we have to do is make sure the broad investigation is conducted first and then we will, of course, keep in close contact with the FSA to see what else needs to be done," she said.
