Treating Customers Fairly (TCF) rules have been slammed by the FSA watchdog over widespread "inconsistencies" between the principles versus the practice.

The Financial Services Practitioner Panel rounded on the FSA for the "disconcerting" departure from the regulator's high-level principles on TCF and inconsistencies between what senior managers at the City watchdog are saying and the day-to-day work of its supervisors.

The panel, comprising industry figures such as Aviva's Patrick Snowball and former Lloyd's chief executive Nick Prettejohn, said it was worried about the implementation, supervision and enforcement of the TCF regime. The "prescriptive application" of the TCF principles was of particular concern.

"At present, confusion persists over the regulator's embedding of TCF and evidencing thereof," the panel said in its annual report.

It said there was anecdotal evidence that FSA supervisors were applying TCF principles in a "highly detail-oriented and meticulous" way that signalled a "disconcerting departure from high-level principles".

This, the panel said, appeared to "hint at a disconnection between senior FSA managers' public stance on principles-based regulation and the daily application of the concept throughout the organisation".

The panel chairman, Roy Leighton, said: "The positive and sensible messages we often hear from Sir Callum McCarthy and John Tiner must be properly translated and understood right the way down the FSA organisation."

An FSA spokesman declined to comment, saying it would respond to the panel "shortly".

The panel's attack came as the FSA published a report on the industry's progress in implementing TCF. It warned the insurance industry that it "must step up a gear" on the TCF initiative or face enforcement action.

The regulator has given insurers and brokers a deadline of March 2007 to hit targets and demonstrate "they are taking the initiative seriously".

The report said that while the majority of firms were making good progress many were lagging behind. The study also found that although the senior management of most firms were showing a commitment to TCF, in many cases this has not yet fully reached the customer-facing front line of those firms' activities.

Clive Briault, managing director of retail markets at the FSA, said: "The TCF principle will only be effective when it makes a real difference to the consumers it was introduced to benefit."