The Financial Services Authority (FSA) has said it is going to step up its action over the mis-selling of Payment Protection Insurance (PPI).
The insurance is typically sold alongside a loan and provides cover if the debt repayments cannot be met.
A FSA mystery shopper exercise found that customers were regularly not told the full details of the policies sold.
Last month, the Financial Ombudsman Service said it had been deluged by complaints about PPI mis-selling.
The mystery shopper exercise looked at how PPI was sold alongside a loan and found that very few customers were told that the cost of the cover would be added to their loan and that they would have to pay interest on it.
Only half of people sold PPI were told what the limitations and exclusions of the policy were, which allows the customer to decide if they would be eligible to claim.
'High priority'
Many people were also not told about both the monthly and the total cost of the policy, with the worst performing firms offering adequate information on cost to very few customers.
"Tackling poor PPI sales practices remains a high priority for the FSA", said Jon Pain, managing director of the FSA's retail markets.
"We will intervene to ensure consumers are protected and are considering what regulatory powers are the most appropriate to deliver fair outcomes", he added.
In light of the continuing bad sales practices, the FSA is now deciding which of its full range of powers would be an appropriate response to the problems that it uncovered.
Lack of competition
The possible sanctions include financial penalties, stopping certain firms selling PPI, and action against individuals.
The FSA says it has told companies what is expected of them and if firms are unable to meet the criteria, the regulator says they should stop selling PPI policies.
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.
It blamed a lack of competition at the point of sale when people took out a loan, and suggested that selling PPI at the same time as approving a loan might be banned.
The commission will make its final recommendations in November or December.
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