The head of the City watchdog has criticised parts of the financial services industry for failing to treat customers fairly.

Sir Howard Davies, chairman of the Financial Services Authority (FSA), said the regulator had been surprised by the level of mis-selling cases it had encountered.

Speaking at the Association of British Insurers annual conference, he said making sure firms sold suitable products to the right customers was probably the key issue facing regulation during the coming months.

He said: "Sections of the industry continue to pay too little regard to the basic principle of treating customers fairly.

"We have been regularly surprised in the past few years at the number of cases of mis-selling and unsuitable advice we have encountered.

"I would have thought, in my simple-minded way, that paying out more than £11 billion in compensation would have focused the minds of firms more than it evidently has on the need to be sure their selling practices are complaint and ethical."

There had been too many cases where the risk associated with products had not been properly explained, where financial promotions seemed "calculated to mislead" and highly risky products sold extensively to unsuitable consumers.

Sit Howard said the FSA had shown if simple and low-risk products were devised, such as stakeholder pensions, it would adapt its regulatory regime.

Many observers of the market remained to be convinced that simple products, such as the Governments proposed suit of low-cost stakeholder-style products, could be removed from regulation entirely.

He said: "If firms do not pay sufficient regard to suitability, consumers are bound to be suspicious.

"This is probably the key issue in financial regulation which we collectively need to resolve in the coming months."

Sir Howard also said urgent action was needed in the area of professional indemnity insurance, the cost of which has risen steeply for financial advisers recently.

Part of the problem is that insurers are nervous about reviews into mis-selling, which they fear could trigger large compensation claims and could be applied retrospectively.

Sir Howard said the concerns arose out of a misunderstanding about the reviews, and added the FSA planned to launch a discussion with the ABI and Association of Financial Advisers about them.