"The FCA board acknowledges the concerns of the market regarding today's press coverage ... The board will conduct an investigation into the FCA's handling of the issue involving an external law firm, and will share the outcome of this work in due course."

Earlier in the day, the FCA confirmed that it would begin an investigation into zombie funds this summer as part of a wider inquiry into the possible mistreatment of longstanding customers. It came a week after George Osborne dealt a blow to the £14bn-a-year annuity market by declaring in the budget that pension savers would be able to do what they liked with their cash from next year.

Shares in Phoenix Group, which controls 5m policies sold under brands such as Pearl, Royal & Sun Alliance and NPI, tumbled 11.5%, while Resolution, which has Friends Provident and Axa Sun Life under its umbrella, plummeted 7%. However, both recovered from even steeper losses in early trading that saw about £3bn wiped off the value of the sector.

The FCA issued an urgent clarification of its plans, saying that it would be examining "how people in closed accounts are being treated", but that it was "not planning to individually review 30m policies, nor do we intend to look at removing exit fees from those policies".

The centrepiece of the FCA inquiry is likely to be millions of pension and investment policies sold in the 1980s and 1990s, in which savers are allegedly trapped by penalty charges of 10%-12% and, in some cases, more than 20% if they want to move their money. Many were sold by salespeople who earned commission of £1,500 to £2,000 a policy, with the first two years of contributions by savers sometimes taken out as charges, followed by annual charges of as much as 4% a year.

As the review is not looking at sales practices, compensation on the scale of the multibillion-pound payment protection insurance (PPI) scandal will not happen.

David Smith, of wealth manager Bestinvest, said: "Almost every week we see customers with policies from Allied Dunbar [now part of Zurich] where penalty charges of 10% are not uncommon, while some older NPI policies have the double whammy of a penalty to transfer out plus what's called a 'market value adjuster', which adds up to 20%. They may be trapped in funds where the annual bonuses have often fallen to zero and where they can't effectively get out until retirement age."

The FCA said its inquiry would be a "supervisory piece of work", which would study a sample of the 30m policies. "These accounts have been closed for many years in some cases, but there are still valid issues to be looked at around the question of the service that consumers receive in relation to those accounts. Are they getting the right information? Are they getting the right level of service? Are these investments still appropriate?" it said.

The latest potential mis-selling inquiry has rocked a sector that over the past 10 days has been battered by regulatory changes. The annuity market is expected to shrivel to just a quarter of its former size in the wake of the budget, while earlier this week, the government imposed a 0.75%-a-year cap on the charges pension companies can levy.

"It's quite incredible just how much good news has hit the pensions industry over the last 10 days," said Smith. "However, today's news could be just as momentous, as it may free the millions trapped in underperforming high-charge funds and drive a stake through the heart of zombie funds once and for all."

Legal & General, one of the worst hit by the expected collapse in annuity sales, issued a statement to the stock market as its shares fell 3.5%, calling for the FCA to bring forward details of its probe, amid what it called a "disorderly market".

Aviva, which saw its shares fall 2.8%, said the FCA's inquiry would at most apply to £200m of its policies, but added that it "has no material exit charges applying to its legacy book".

In a statement, it said: "Aviva believes that its treatment of customers has been fair and appropriate, and therefore any impact on the group's profits should be minimal, if at all."

Phoenix said it was confident that its historic charging structures, including exit charges, "have been compliant and in accordance with our commitments to our policyholders", but said the pensions charges cap could have a £40m impact on the group's embedded value – a measure used to value insurers.

However, financial advisers warned that insurers would now come under intense pressure to make it easier for customers to leave. "People may say, 'Now I've realised what you're charging me, I'd like to leave,' so I think they will need to give them the option to do so," said Tom McPhail, of Hargreaves Lansdown.

Patrick Connolly, a certified financial planner at Chase de Vere, said the inquiry was "not before time", as many people were locked into inflexible products with "extortionate" exit penalties.

"While times have moved on and those taking out pensions more recently should have benefited from much lower charges, insurance companies have been reluctant to address their older contracts and offer a fair deal to policyholders," he said.

Who is affected?

You may be affected if you are one of the millions of people who bought £150bn worth of pensions and investment policies from life companies in the 1980s and 90s. The investments in question include personal pensions, endowment policies and "whole of life" insurance policies, and are all in funds that are now closed. The pensions under the spotlight are personal funds, set up by individuals, rather than workplace schemes.

Some of the products have high charges and hefty penalties if you want to withdraw or move your cash, while some will have guaranteed payouts that couldn't be achieved today, so people should not withdraw their money without taking advice.

Will the review mean big PPI-style payouts for customers?

That seems unlikely at the moment. The regulator has said it will not be looking at sales practices, so the review will not trigger repayments of premiums, unlike the PPI scandal. It has also said that it is not looking at applying current standards retrospectively – so it is unlikely that policyholders will get back years' of fees. However, if the review does discover that consumers have lost out significantly due to certain practices or products it is possible that ultimately firms could be forced to reimburse anyone who has been affected.

What do I need to do now?

For the moment, sit tight. The Financial Conduct Authority will begin its "supervisory work" looking at companies this summer and will not be reviewing individual policies, only practices. However, the news should be a wake-up call to consumers who have policies languishing in ancient funds. It is worth digging out paperwork to find out which firm now looks after your money, then checking how much you are paying to manage your cash. In many cases, exit penalties will prohibit you moving the money, but it may be worth taking advice.

If you think you may have been mis-sold the policy in the first place, you can take that up with the firm in question – and if it rejects your complaint, you can refer it to the financial ombudsman.

It is possible that pension liberation firms – which try to persuade people to move money out of their pension into their own scheme – or claim management firms could latch on to the FCA's action and see it as a sales opportunity. Consumers should be wary of any unsolicited offers of help.