The Financial Services Authority (FSA) is under pressure to soften its demands that mortgage insurance customers be given redress, including refunds, for unfair changes to their policies that led many to cancel their cover.

The City regulator set out its orders in a letter to companies that it says treated customers unfairly by increasing their premiums, reducing payment levels, and even cancelling their policies.

But months after declaring these actions “unacceptable”, the FSA has yet to enforce its demands on suppliers and distributors of mortgage payment protection insurance (MPPI). Nor has it yet pushed through changes to ensure new policies are fairer.

“We are trying to give them [the FSA] as much of an understanding as possible of the practical difficulties of what they are demanding,” said Adam Cracknell, a spokesman for Aviva, one of the country’s largest insurers. “We hope they will change their position.”

The comments broke the silence on the issue from industry bodies, including the main trade associations for banks and insurers, which have not wished to comment while in talks with the FSA.

The FSA did not respond directly to Aviva’s remarks this week, but said that “any regulatory solution would be industry-wide and seek to ensure that MPPI customers are treated fairly”.

“Our aim is to deliver a pragmatic and proportionate regulatory solution that delivers an appropriate degree of protection for consumers,” said Adam Richards-Gray, a spokesman for the FSA.

“I am unable to specify what any solution would involve or who would be covered by it,” he added.

“Our work is ongoing but when it is concluded we expect firms to take immediate steps to implement any solution that is reached.”

Richards-Gray said it was necessary for its discussions with industry to be held in private “to help us do our job effectively and to help us reach the best outcome for consumers”.

The FSA’s intervention was prompted by market- wide revisions to the policies held by millions of borrowers to help meet monthly mortgage repayments in the event of accident, illness or unemployment.

As jobless numbers spiralled upwards earlier this year, many policyholders were shocked to be given notice, often 30 days, that their premiums were rising by between 40 per cent and 100 per cent.

Some insurance providers even withdrew cover altogether or reduced the monthly benefit – sometimes by hundreds of pounds – that the policies would pay to cover a mortgage repayment.

In a letter to individual companies in June, the FSA said it expected existing customers who had unfair premium rises to be refunded, and any decreases in cover to be reversed.

It also wanted any customer who had cancelled a policy in response to an unfair variation in their contract to have their cover restored. Cover cancelled by an insurer was to be reinstated, as well.

The FSA is also believed to have asked some companies to reword their MPPI contracts to ensure that they don’t contain unfair terms and to make marketing literature for MPPI clearer.

Consumer groups said it is “not acceptable” for the FSA to hold discussions involving consumer detriment of this degree behind closed doors.

“As soon as you have discussions like this, there is a risk of pressure being applied as appears to be the case,” said Teresa Fritz, of Which?, the consumer group. “We would be very concerned if the FSA position is watered down.”

MPPI customers who feel poorly treated by their provider can complain to the company and then go to the Financial Ombudsman Service if the dispute is not resolved.

“Any regulatory solution would not affect consumers’ rights to complain to the firm in the first instance and, if not satisfied, to the ombudsman,” said Richards-Gray of the FSA.

Consumers who are buying new cover now are still likely to find small print in their policies that predates the FSA’s intervention.

“The terms and conditions of our policy remain the same because, like other players in this market, we are still awaiting the outcomes and guidance resulting from conversations underway between the industry and FSA,” said the Post Office, which this year raised premiums, decreased cover and tripled the deferment period on its MPPI policy.

Those looking for new MPPI will also have less choice and less generous cover than a year ago.

“Definitely, over the last 12 months, policy coverage is not as attractive as in previous years,” said Emma Walker of Moneysupermarket.com, the comparison website.

“We have seen premiums increasing, in some cases three times as much.”