The government could introduce prison sentences for people involved in stealing or using of people's personal data.
Justice minister Michael Wills said it is time to consider "more robust" penalties than the current fines.
A public consultation was launched by the Ministry of Justice last week. The consultation paper proposes introducing prison sentences as the maximum punishments.
People who are convicted could be imprisoned for up to two years if the case is heard in the Crown Court, and up to 12 months if heard in the magistrates court.
"The knowing and reckless misuse of personal data is a serious criminal offence. We have been monitoring this illegal trade closely with the help of the information commissioner and as there is a great deal of concern about the protection of personal data we think the time has now come to consider a more robust penalty," said Justice minister Michael Wills.
Jamie Cowper, director of marketing at data encryption expert PGP Corporation, welcomed the consultation. "Current penalties - fines of just a few thousand pounds - act as no deterrent to professional data thieves who can potentially make 10 to 20 times more than this by selling their ill gotten gains to the highest bidder. Custodial sentences, such as those proposed by the Ministry of Justice, may make them think twice in the future."
The number of UK identify fraud has increased by 36% in the past year according to research released today to mark the start of National Identify Fraud Prevention last week.
The consultation closes on 7 January 2010.