A part of banking group HSBC has been fined £1m for failings over payment protection insurance (PPI).
HFC Bank is the ninth firm to be fined over PPI by the FSA
The Financial Services Authority (FSA) said HFC Bank failed to ensure customers received suitable advice between January 2005 and May 2007.
HFC said it would change its sales processes, and would put in place a "robust remedial action plan" to make sure customers were not disadvantaged.
The fine is the largest issued by the FSA over PPI failings to date.
PPI covers repayments on loans, mortgages and credit cards if the borrower is unable to make them because of loss of earnings as a result of accident, sickness, unemployment or death.
It has been widely criticised by consumer groups for being expensive and offering limited benefits to policyholders.
As part of an ongoing focus on PPI, the FSA has already fined eight companies a total of £1.8m over poor sales practices, and publicly censured an additional two firms.
HFC Bank is the UK arm of the giant US loan company Household International, which was bought by HSBC in March 2003.
It offers secured and unsecured personal loans via a 136-strong branch network, and has 1.5 million customers, many of whom have a poor credit rating.
Trading under the Beneficial Finance, and Household Bank brands, the bank sold 163,000 PPI policies between January 2005 and May 2007. This represented 75% of the loans it provided during the period.
The FSA said the firm failed to have adequate systems and controls in place which put its customers at an "unacceptable risk" of being mis-sold PPI.
"We announced in September that we would be imposing higher fines for serious failings in the retail market including against firms who fall short in relation to PPI," said the FSA's director of enforcement Margaret Cole.
"The fine against HFC - the biggest PPI fine to date and first since our September announcement - is evidence of our determination in this area.
"HFC's failings put its customers at risk of buying unsuitable protection insurance and the financial impact on them of unsuitable advice was likely to be significant," she added.
In response, the bank said it was "committed to ensuring that customers are only recommended products that are suitable for their demands and needs".
"It is, therefore, disappointing that in certain respects our procedures have been found to fall below the standards expected by the FSA and which we set ourselves," said head of communications Patrick Long.
HFC Bank: £1,085,000
GE Capital Bank £610,000
Redcats (Brands) Ltd: £270,000
Capital One Bank £175,000
Regency Mortgage Corp: £56,000
Home & County Mortgages: £52,500
Capital Mortgage Connections: £17,500
He confirmed that a programme of improvements to the bank's procedures to ensure the issues identified by the FSA are addressed, "is already well under way".
Mr Long said the FSA has not put forward any evidence that customers have been disadvantaged a result of the issues it has identified.
However, he added, HFC is taking steps "to ensure that this is the case".
By co-operating with the FSA the firm qualified for a 30% discount, without which the fine would have been £1,550,000.
The FSA is working closely with the Competition Commission, which is currently carrying out its own investigation of the £5bn market after a referral from the Office of Fair Trading (OFT).
It acted in response to a so-called "super-complaint" from Citizens Advice which argued that the PPI market seriously harmed the interests of consumers.
The Competition Commission is expected to publish provisional findings in May 2008.