Facebook has said insurance giant Admiral will not be allowed to offer drivers reduced quotes by allowing their profiles to be scoured in a bid to determine their personalities.
In a statement, Facebook said protecting the privacy of its users is "of utmost importance to us" and there are "clear guidelines" preventing information obtained from the social media website being used to make decisions about eligibility.
Admiral had said people buying their first car could join an optional scheme to receive a discount of up to 15%.
Admiral had said an algorithm would be used to analyse Facebook profiles to determine whether prospective customers would be careful drivers.
But Facebook said accounts are only used for login and verification purposes.
A Facebook spokeswoman said: "Protecting the privacy of the people on Facebook is of utmost importance to us. We have clear guidelines that prevent information being obtained from Facebook from being used to make decisions about eligibility.
"We have made sure anyone using this app is protected by our guidelines and that no Facebook user data is used to assess their eligibility. Facebook accounts will only be used for login and verification purposes.
"Our understanding is that Admiral will then ask users who sign up to answer questions which will be used to assess their eligibility."
Louise Haigh, shadow minister for the digital economy, said the Government urgently needs to establish the parameters and ethics around the use of data on social media.
Haigh, who has a background in the insurance industry, said: "We need to get ahead of the game."
On its website, Admiral said: "New drivers are often quoted much higher insurance premiums as they have little driving history, zero no-claims bonus and are viewed as 'high risk'.
"But we want to help make sure safe drivers aren't penalised and get the best price possible. To do this, we'll look at your Facebook profile to help us get a better understanding of the type of driver you are.
"There's a proven link between personality and how people drive, and our clever technology allows us to predict who is likely to be a safe driver."
No one at Admiral was immediately available to comment.