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Knowlden Titlow Financial Services has been fined £35,000 and Derrick Hales Financial Planning fined £10,500 as a result of the failures.

Derrick Hales and Kathleen Hales have also had their permissions to perform the role of compliance officer and the role of partner cancelled by the FSA respectively.

The FSA said the two fines were the first enforcement cases to arise from a targeted review of the advice and sales processes of firms recommending geared traded endowment policies.

Head of retail enforcement Jonathan Phelan said: "Geared traded endowment policies are complex investments. We found with both firms that their advisers did not understand how these products work, nor could they show us they had a clear grasp of the risks involved.

"This made it impossible for them to properly advise customers whether the policies were suitable for them.

"These two cases are the first to arise from a recent programme of work we have done into the geared traded endowment policy market, and we will be taking further appropriate action to deal with the examples of bad practice that we uncovered in other firms."

The FSA said Knowlden Titlow failed to ensure that all of its advisers fully understood the policies and their risks before recommending them to customers and failed to gather enough information about its customers to support and ensure the suitability of its recommendations.

It also failed to adequately explain the risks associated with geared TEPs.

In addition to the fine, the firm has agreed to stop selling geared TEPs and to contact all customers sold potentially unsuitable policies, offering redress where appropriate.

Meanwhile, the FSA said Derrick Hales Financial Planning failed to gather enough information about its customers and failed to communicate clearly to customers the characteristics and risks associated with geared TEPs.

It added that the firm also failed to ensure advisers properly understood the products they were selling and did not properly review sales.

Derrick Hales Financial Planning has also agreed to stop selling the policies and is to review its past business to identify the extent to which customers may have been given unsuitable advice.

Where applicable, it will "assess and make good any loss suffered and to provide further training and compliance support to staff", the FSA said.