The FSA is conducting a review into insurance firms' use of private investigators amid suspicions of poor practice.
The regulator said firms potentially not complying with regulatory obligations had come to its attention through market intelligence, industry sources, reports in the media, and customer experience suggesting possible poor practice.
Simon Green, head of general and wholesale insurance at the FSA, said insurance claim fraud was an ever increasing problem for the insurance industry and private investigators were part of a firm's legitimate anti-fraud strategy.
He said: "We are, however, looking at whether insurance companies have appropriate oversight when using external private investigators.
"At the moment, this is a piece of work designed to help us better understand market practice, but we are not ruling out undertaking further work or using the regulatory tools available to us should we find that firms are not complying with their regulatory obligations."
The City watchdog is requesting information from insurance firms about use of private investigators to determine any further steps needed including visiting insurance companies to look in more detail at the controls operated.
The regulator added it was focussing activity on insurance companies to ensure regulatory obligations were met with regard to oversight of private investigators used.
According to the FSA causes of concern include insurance companies using private investigators as a tactical tool to drive reductions in valid claim payments and the oversight by firms regarding the appointment and on-going control of private investigators not being adequately robust.
The regulator also said it would address any issues with incentivising private investigators to produce findings that reduce payments on valid claims, perhaps through profit share/over-riders or in a more nuanced way such as long-term contract retention.
The survey questions include; setting out the circumstances in which the firm or its agent(s) would appoint a private investigator regarding a specific claim; identifying any instances where a private investigator has or may have acted outside expected professional standards; and the information the firm normally asked a private investigator to collect where a claimant suffered a personal injury.
The FSA said it would look to test firms were meeting obligations under relevant FSA Principles, Systems and Control (SYSC) 13.9 Outsourcing and ICOBS 8 - claims handling.
