The FSA's move is the latest crackdown on PPI mis-selling
Mortgage lenders and insurers have agreed to refund £60m to customers whose premiums for mortgage payment protection insurance went up this year.
The refunds have been ordered by the Financial Services Authority (FSA).
The regulator is worried that premiums have been raised, and the level of cover limited, unfairly.
The payment protection insurance is supposed to pay people's mortgage repayments if they fall ill or are made redundant.
The industry had been accused of jacking up premiums, just when people were beginning to claim on their policies due to rising levels of unemployment.
"The FSA's concerns centred on the terms permitting these changes, and how clearly they were disclosed," the regulator said.
"[It] will put affected customers back in the position they were in before the policy was changed.
"It will also give all mortgage payment protection insurance customers clarity about when and why firms will be able to vary these in future," the FSA said.
The move follows last month's decision by the FSA to order banks and other lenders to compensate customers who may have been mis-sold other types of payment protection insurance, especially the so-called "single-premium" variety that is often sold to people when they take out an unsecured personal loans.
The consumers' association Which? said the latest move would benefit about one million people.
"We're pleased that the FSA has taken action against firms who've effectively been selling people umbrellas, then trying to take them away at the first sign of rain," said Which? personal finance campaigner, Lucy Widenka.
"Customers must be refunded as quickly as possible, as many could be in financial difficulty as a result of their cover being reduced," she added.
Which? complained about the issue to the FSA in May.
The FSA's chairman, Lord Turner, raised criticism of the way policies had been changed when he spoke to the conference of the Association of British Insurers (ABI) in June.
As well as paying back the increased premiums, dating back to the start of this year, the industry has agreed to:
• reinstate any cover that was reduced
• reinstate polices if a customer cancelled it within two months of the premium going up or the level of cover being cut
• freeze both premiums and the level of cover on offer for the rest of this year
• ensure all customers are told explicitly of when their contacts allow either the premiums or cover to be changed
The deal has been agreed with the ABI, the British Bankers Association, the Building Societies Association and the Council of Mortgage Lenders.
"The financial services industry has reached this agreement with the FSA to reassure customers, minimise market confusion, maintain confidence in mortgage payment protection insurance and ensure that people who have [the insurance] can maintain their cover, especially in these times of continuing economic uncertainty," they said.
The ABI's Director General, Stephen Haddrill, added:
"Mortgage payment protection insurance customers do not need to take any action, although it is important that they continue to pay their premiums to ensure that their cover continues."
"Their mortgage lender or insurer will contact them if their policy is affected in any way," he said.