The Treasury is reluctant to force the FSA to launch a Spitzer-like investigation into the UK insurance industry over fears that foreign companies may desert the City.

It is understood that Treasury officials are worried that brokers operating in the wholesale financial sector, which are internationally mobile, could relocate if the UK and the City are not competitive.

The insurance industry as a whole is the largest contributor of invisible earnings in the UK economy. Any major investigation into broker's placement service agreements or insurer inducements could lead to a major exodus of key companies, sources said.

According to ABI figures, the UK insurance industry contributed £6.4bn to the UK economy's invisible earnings in 2003.

A senior market source said: "The Treasury does not want to upset the apple cart. Insurance contributes the largest amount of invisible earnings to the UK economy in the financial services sector.

"If the FSA were to investigate, it may force foreign companies to focus on their domestic markets. That could severely damage the Chancellor's tax plans and drag the City further into deficit."

An FSA spokesman said: "We have stated that the FSA has no statutory powers until 15 January 2005 but we have made it clear, from that date, that we will expect more transparency in the market and that any inducements must be fair and not anti-competitive."

A Treasury spokesman said: "Clearly, the FSA has a responsibility to intervene when appropriate."