The review follows leaked internal documents, published two weeks ago in the Independent on Sunday, which showed Colonial was concerned about training and supervision of salesmen and administration as recently as May this year.
Ten days ago, the Australian-run insurer announced the terms of its long- awaited worldwide demutualisation, under which more than 350,000 UK policyholders will receive cash or shares worth pounds 285 on its planned pounds 1bn flotation next year.
The personal financial watchdog, the Personal Investment Authority, has come under fire for ineffective investigations of claims by former managers and trainees about Colonial's training and supervision of salesmen as far back as 1990.
Following the criticism, Treasury and DTI civil servants have now asked Jane Coakley, the Securities and Investments Board official responsible for supervising the PIA, to ensure that it mounts a proper investigation.
The case has been handed to Graham Turner, the PIA's head of field investigations, who isstarting a further review from scratch. Yesterday, neither Mr Turner nor Colette Bowe, the PIA's chief executive, would comment directly on the case.
But one SIB source said: "The affair under review is clearly the responsibility of the self-regulatory organisation. We as supervisors of the system follow up any indications that anything is going wrong with that supervision. There is an automatic follow-up of everything in the press."
Colonial's general manager, Rob Garnsworthy, has said that the insurer has thoroughly cleaned up its act. It was previously fined by regulators and sacked two managers in 1994 over allegations of falsifying training records.
However, internal documents prepared ahead of the PIA's last periodic inspection visit in June highlighted concerns voiced in May by the firm's compliance officer and its own internal review team over training, supervision, competence and record- keeping.
The visit was postponed from December at Colonial's request. Sources say the regulator conducted but a cursory inspection, despite assurances in February that it would re-open an investigation into previous allegations.
One of the memoranda, to national training manager Eric Burrow, was available to the PIA team at the time of the inspection.
The second, a hard-hitting report from compliance officer John Anthony to Mr Garnsworthy, was not. It was,however, sent to the PIA by the company after the Independent on Sunday faxed a copy to Colonial for comment three weeks ago.