Chancellor George Osborne is "profoundly concerned" over the Financial Conduct Authority leaking details of a major insurance investigation to a newspaper, which ended up slicing billions of pounds off insurance company stock values.
"The starting point must be that the FCA holds itself to at least as high standards as it would expect of a listed company handling highly market-sensitive information," said Osborne in a letter published on HM Treasury's website.
Osborne added that the regulator's own inquiry into the leak had to be "completely independent".
In tandem, the Association of British Insurers (ABI), which is still reeling from Osborne's surprise Budget 2014 pension bombshell, revealed that it was writing to Osborne to ask the government to launch a "completely independent investigation" into the FCA's handling of a leak.
On 28 March, the FCA leaked some of the details about an inquiry into whether 30 million customers of pensions and other products were "exploited" or mis-sold products.
The leak to the Daily Telegraph, days before the release of a detailed business plan for the coming year, saw £4bn (€4.8bn, $6.7bn) wiped off insurance stocks.
The FCA refused to confirm the report to the rest of the press for hours after the leak but as insurance stocks plunged as a result, Legal & General urged the watchdog to officially confirm and release details.
It eventually confirmed that it will examine investments languishing in funds that are closed to new business, known as "zombie fund" policies, sold by doorstep salesmen between the 1970s and 2000.
On 31 March, when the regulator should have officially launched the probe, FCA chief executive Martin Wheatley said "whenever markets move like they did on Friday there is always scrutiny."
"This was clearly not the FCA's finest hour but it does serve as a timely reminder to all parties involved of the care and thought that is needed when handling significant amounts of information we hold as part of going about our business."
Influential politician Andrew Tyrie hit back at the FCA's handling of the news and that the watchdog should have handled the issue better.
"On the face of it, this is an extraordinary blunder," said Andrew Tyrie, chairman of the Treasury Select Committee and Parliamentary Commission on Banking Standards.
"It is crucial that we have a full and transparent explanation about how such an apparently serious mistake came to be made by our financial services watchdog - the body appointed by Parliament to enforce high standards of conduct."
Meanwhile, FCA said it "acknowledges the concerns of the market regarding today's press coverage of the FCA's proposed supervisory work on the fair treatment of long standing customers in life insurance.
"The FCA put out a statement of clarification this afternoon. 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."
However, Tyrie said that "more than that is needed".