The Financial Services Authority (FSA) said it would be increasing the action it took against companies that failed to comply with its rules. The move follows a mystery shopping exercise carried out by the regulator into the way single premium PPI is sold alongside loans.

It 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 key limitations and exclusions of the policy were, something which is fundamental to establishing whether the customer would be eligible to claim on the policy.

Many people were also not told about both the monthly and total cost of the policy, with the worst performing firms offering adequate information on cost to very few customers. The FSA is considering the action it will take to deal with the continued bad sales practices, but sanctions could range from changing the rules relating to the sale of the product, to fines or to changing firms' permission to sell certain products.

It is also looking at ways to identify and rectify sales of PPI that have been made in the past and do not comply with its rules.

FSA retail markets managing director Jon Pain said: "Tackling poor PPI sales practices remains a high priority for the FSA.

"We will intervene to ensure consumers are protected and are considering what regulatory powers are the most appropriate to deliver fair outcomes.

"Firms may wish to consider stopping selling single premium PPI sold alongside unsecured personal loans, given the continuing problems in the sales of this product." PPI, which covers debt repayments if the holder is unable to work or loses their job, has come in for heavy criticism in recent years, following claims that it is overpriced and often mis-sold to people who will never be able to claim on it.

The Competition Commission issued a damning report on PPI earlier this year in which it said consumers were being overcharged for the cover by £1.4bn a year due to a lack of competition in the market.

It warned that it was considering banning the sale of PPI alongside mortgages, loans and credit cards, adding that it may also introduce a price cap as a temporary measure to reduce the cost of the policies.

The FSA is also considering concerns raised by the Financial Ombudsman Service (FOS) about the sale of PPI after it saw a tenfold rise in complaints.

Chief executive of consumer group Which? Peter Vicary-Smith said: "This damning evidence demands that the FSA stops dithering and takes decisive action to sort out the PPI market.

"Its weak response to date has done little to help the millions of people who may have been mis-sold policies or to improve sales practices. The FSA needs to use its full range of enforcement powers in the interest of consumers."

But director of general insurance and health at the Association of British Insurers Nick Starling said: "With increasing unemployment and over-indebtedness, it is essential that people protect themselves against losing their regular income. PPI is the only financial product that covers unemployment.

"Sales should always comply with regulation and we take the numbers of complaints seriously.

"We have proposed to the FSA that industry guidance should be produced in order to improve complaints handling."