The FSA said the failings were the most serious they had seen
Alliance & Leicester has been fined a record £7m by the City watchdog for three years of mis-selling sales of payment protection insurance (PPI).
The Financial Services Authority said the bank had trained its staff to put pressure on customers who queried the inclusion of optional PPI in a quote.
A&L apologised for its "shortcomings" and said it would pay people back.
PPI is typically sold alongside a loan and provides cover if the debt repayments cannot be met.
A&L sold approximately 210,000 PPI policies to customers seeking a personal loan averaging £1,265 from January 2005 to the end of 2007.
The FSA said there had been a general failure by telephone advisers to give customers details of the cost of PPI.
"The failings at A&L are the most serious we have found. This is reflected in the record PPI fine," said Margaret Cole, FSA director of enforcement.
She said that customers should be able to rely on impartial advice based on their individual circumstances.
It was "particularly unacceptable", she said, for advisers to have been trained to recommend insurance that customers might not want or need.
Firms should not rely on paperwork sent out after a telephone call as an excuse for unclear or misleading statements, she added.
A&L, which is being taken over by Banco Santander, said it would be writing to customers who took out these policies at any time during the three years.
Alliance and Leicester is being taken over by Spain's Banco Santander
Overseen by accountants, it will also review any rejected complaints and claims and will pay customers back "where appropriate".
"I apologise sincerely for our shortcomings," said David Bennett, group chief executive of A&L.
"Customers can be assured that we are taking this matter very seriously and that we have reviewed and tightened up our processes from December 2007 to ensure that all customers get the right information and advice."
Peter Vicary-Smith, chief executive of consumer group Which?, said that it was now clear that any firm flouting the rules would be "severely punished".
"Now the fine has been set, we want everyone who was mis-sold to get their money back. This can be done by ensuring that any communications to consumers are clear and straightforward about their rights," he said.
"Anyone who has a personal loan or credit card should check whether they have a PPI policy and, if they think it was mis-sold to them, should consider making a complaint."
The FSA has previously taken action against 18 firms over poor PPI selling techniques.
These included an £840,000 fine for Liverpool Victoria Banking Services and a fine of just over £1m for HFC Bank.
A week ago, the watchdog said it was going to step up its action over the mis-selling of PPI.
"It is very disappointing that, after three years of regulation, we are still finding serious problems in PPI sales," said Ms Cole.
Last month, the Financial Ombudsman Service said it had been deluged by complaints about PPI mis-selling.
In June this year, the Competition Commission concluded that banks and credit card companies were overcharging their PPI customers by a total of £1.4bn a year.