The Financial Conduct Authority is to investigate how payment protection insurance (PPI) compensation is being paid.
Lenders have been paying redress to consumers who were wrongly sold loan insurance policies, with £17.3bn paid out between January 2011 and October 2014.
The consumer finance watchdog now plans to look at whether the current compensation scheme is meeting its aims of protecting borrowers and restoring faith in the financial system.
It comes months after banks, credit card firms and loan providers agreed to reassess two and a half million claims from 2012 and 2013, which may have been unfairly rejected or underpaid.
High street banks including Lloyds, Barclays, HSBC and Royal Bank of Scotland have already set aside £24bn to compensate consumers.
Yorkshire Bank was forced to put additional funds aside in 2013 and 2014 to settle PPI complaints.
It brought the total funds set aside to deal with conduct issues at Yorkshire and Clydesdale banks, including the mis-selling of other products, close to £1bn.
The Financial Conduct Authority (FCA) said findings from its investigation will be published in the summer.
It will then consider whether “further interventions” are needed, which could include a consumer campaign, changes to compensation rules including time limits on complaints, or ending the PPI scheme in its current form.
In August, the FCA said providers have handled more than 13 million complaints since 2007 and paid compensation on more than 70 percent of complaints.
But Which? executive director Richard Lloyd said banks “should be doing more” to resolve complaints.
He said: “People shouldn’t be forced to take their complaint to the Financial Ombudsman, or use unscrupulous claims management companies.”