The letter follows a review carried out between June and September 2010 which found 19 firms were failing in the sale of general insurance policies.

The FSA wants firms to take responsibility for checking eligibility of customers and check they have the correct permissions for giving financial advice.

In the case of ‘white label’ firms which use the comparison tool of a third party, they must make customers clear which firms they are dealing with and check that the provider holds the necessary permissions to conduct regulatory activity.

The FSA said: “We are proposing this guidance because we found there to be a lack of understanding within the industry generally about the regulated activity being conducted by these firms leading to failures to comply with our rules which could lead to customers not being treated fairly.”

It believes customers could be misled into believing sites offer a quote based on their needs and demands rather than an illustrative quote.

Customers could also be unable to claim benefits against a policy they purchased due to lack of opportunity to disclose the relevant facts.

The Treating Customers Fairly principle aims to ensure an efficient and effective market to help customers achieve a fair deal and firms must demonstrate to the FSA they are delivering these fair outcomes.

The proposed guidance is open to consultation until 8 August.