Aviva’s planned takeover of Direct Line is to be reviewed by the UK’s competition watchdog, potentially setting back a £3.7bn deal.

The two insurance firms agreed a major deal in December last year, but the Competition Markets Authority (CMA) said it was investigating whether a merger would result in a “substantial lessening” of competition in the insurance sector.

The combined companies would make become a significant force in the car insurance sector, which has caught the attention of the CMA.

The watchdog will report its findings of the probe in July.

If the Aviva and Direct Line deal goes ahead, it would boost its dominance in the insurance market against rivals such as Legal & General and Prudential.

Aviva shareholders would own about 87.5% of the new company while Direct Line shareholders would own about 12.5%.

The combined company would result in an insurer with more than 20% of the share of home and motor insurance in the UK.

Direct Line owns the Churchill and Green Flag brands, as well as its namesake brand as part of a portfolio offering car, pet, home and other insurance policies.

In December, experts at JP Morgan said they did not expect any competition concerns from regulators.

But the CMA said the creation of a single firm “may be expected to result in a substantial lessening of competition within any market or markets in the United Kingdom for goods or services”.

The BBC has contacted Aviva for comment.

Any interested parties have been asked to provide feedback to the CMA by 29 May.

This means individuals or companies who have a vested interest in the outcome of the deal as they may be impacted can have their say.