The Financial Services Authority has warned firms that sell payment protection insurance to take urgent action to ensure full compliance after an investigation by the City watchdog revealed serious failures at some providers.

The FSA sent mystery shoppers to 30 firms selling the insurance to find out whether rules introduced last January were being followed. Payment protection insurance (PPI) protects consumers with loans against changes in personal circumstances affecting their ability to continue making payments.

Problems found by the FSA included: inappropriate sales to consumers who could not claim or would get very limited cover; advice given by non-qualified staff; poorly explained policies and inadequately trained staff. Clive Briault, FSA managing director for retail markets, said: Those firms where these problems exist must take urgent action to address them.

This poses a serious risk to consumers because of the poor disclosure of product and price details; the possibility that consumers may not be eligible to claim against their policies; and the fact that consumers may not be aware that they may receive little money back if they cancel these policies early.

The Finance and Leasing Association, the trade association for consumer credit, motor and asset finance, has responded to the investigation with research of its own, due out next month. Martin Hall, director general of the FLA said: Prompt cross-industry action in response to FSA’s findings is preferable to more regulation.

This does however require the commitment and involvement of all concerned. Mis-selling can never be justified and consumers need to be able to understand clearly the cost, scope and limitations of policies.