"There is a very real prospect that conditions will worsen further into next year, in terms of both liquidity and credit risks. Firms should therefore be assessing their funding and liquidity positions; undertaking robust stress testing to reflect current and prospective market conditions; reviewing and assessing their medium and longer term strategies and the options open to them; and considering contingency plans against the worst outcomes."

He continued: "We want there to be a competitive and thriving mortgage market in the UK which clearly meets the needs of consumers. This requires lenders who have clear strategies - appropriately stress tested - that take account of the changing world, with viable funding models, and with boards and senior management that understand and know how to operate in the best interests of their customers in a variety of market conditions."

In his speech, Mr. Briault also announced that the FSA is to take an urgent look at whether lenders are complying with FSA rules and treating customers fairly in their practices for the handling of mortgage arrears and possessions.

Mr. Briault went on to explain that:

"Arrears and repossessions have increased significantly, albeit from a very low base and concentrated in specific sectors of the market. We expect lenders to meet the requirements on the treatment of customers in payment difficulties set out in our mortgages conduct of business sourcebook. Firms must have in place, and operate in accordance with, a written policy and procedures for dealing fairly with customers in arrears."

"A fairly consistent picture is emerging of some lenders across the market appearing to be unwilling to consider cases on an individual basis, unwilling to agree a solution tailored to the borrower's individual circumstances, and apparently adopting a one-size fits all approach to arrears recovery. In response to this emerging picture, we will shortly be launching a piece of firm-facing thematic work on the arrears management practices of firms, to establish whether there is a problem of non-compliance with our rules and with the general principle of Treating Customers Fairly."

He concluded: "Clearly, this needs to be done as a matter of some urgency, before any further increase in arrears rates, and we expect the initial phase to be completed by the end of March next year."