The chief city watchdog has found "serious failures" in the sale of payment protection insurance (PPI), it said today.

The Financial Services Authority (FSA) said it was "extremely disappointed" that a number of firms had failed to clean-up their sales practices following an ongoing campaign by the regulator.

The FSA singled out 4 firms who had fallen short of industry standards for further investigation, but said a further 20 could also face investigation.

Firms that fail to improve processes face a fine or could be banned from selling the policies. Nationwide, the UK's biggest building society, recently withdrew its credit card and loan PPI policies after the FSA began the crackdown. Hadenglen Home Finance, a mortgage broker, was fined £133,000 earlier this month for selling PPI policies that some customers might never have been able to claim on.

PPI, designed to cover times when borrowers are unable to meet their loan repayments, has been attacked for being an unsuitable, overpriced and inflexible type of insurance.

Lenders have been criticised for using the policies, which make an estimated £5.5 billion a year, as a cash cow. However industry experts and debt groups today criticised the FSA for a lack of action.

Teresa Fritz, of Which? Money, the magazine, said: "It is shocking that, despite lenders assurances that they will clean up their act, PPI is still being mis-sold to such an extent. We want the FSA to name and shame offending lenders so that people are aware of which companies are breaching the rules."

Research by Capital Blue, an independent market research firm, found that more than 30 per cent of borrowers still feel pressurised to buy linked insurance products when they take out a loan.

The FSA said that while more firms were now making it clear to customers that PPI is optional and are offering refunds, many are not explaining the cost or what the cover is for.

Andrew Hagger, of Moneyfacts, the price comparison website, said: "Consumers have little faith in the financial services industry as shown by the reaction to the Northern Rock incident, so this lack of action is going to do little to improve the customer perception of our industry."

Clive Briault, FSA Managing Director of Retail Markets, said: "While some progress has been made by the industry, we are extremely disappointed that some firms have still made little progress in improving their sales practices. The right PPI can provide valuable protection for consumers, but they are entitled to expect that they will be treated fairly by firms when they buy it. They must be told how this product works, what it covers, and how much it costs."

Britannia building society, the AA and Intelligent Finance offer some of the most expensive PPI policies, while Leeds Building Society offers the cheapest, according to Moneyfacts. On a £10,000 loan repaid over five years, a borrower with Britannia would pay £4,189.80 in PPI, compared to £1,473.00 with Leeds Building Society.

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