Internet bank Egg, now owned by Citigroup, was today fined £721,000 by the Financial Services Authority for "serious failings" when it sold payment protection insurance (PPI) on its credit cards.

The watchdog listened to hundreds of taped conversations between Egg salespeople and customers and heard some staggering failings. The fine would have been more than £1 million if Citi had not admitted fault and agreed to pay up quickly.

The FSA found that four out of 10 people who took out Egg cards over the phone between 2005 and 2007 were given misleading or poor advice. Egg is offering compensation to anyone who thinks they may have been misled. That could cost Citi as much as £6.7 million in payments to more than 40,000 cardholders.

Citi today apologised to "any customer affected", and said it would be contacting them. It added that it has stopped sales of PPI by phone.

In the tapes heard by the FSA, one customer objects several times to the sale, only to get the response: "I'll just send you the paperwork then."

Other sales staff rolled two questions into one: "Can I begin your cover and get some details out to you?" That generally got the "OK" answer the sales team felt it needed.

Another customer said: "I'm going to insist, I really don't need it, I just don't need this insurance at all." The salesperson mentioned that PPI was free so long as there was a zero balance on the account, and then simply continued to read the prepared sales script.

A customer who asked if his slipped disc would be excluded from the Egg cover was incorrectly told it would not. But existing medical conditions are always barred from PPI.

The Competition Commission has said UK consumers are overcharged £1.4 billion a year for PPI, and next month will publish robust new rules to restrict its sales and to cut prices.