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The warning is included in a review that has been carried out by the regulator to ascertain whether lenders have been acting responsibly in their lending activities.

The review was sparked off by former FSA head of retail markets Clive Briault, who said some lenders were not adequately looking at customers individual circumstances when deciding to repossess. He said this raised concerns that lenders were being too systematic in their approach.

The FSA said the review found weaknesses in the way some lenders were handling arrears and repossessions, particularly for consumers with impaired credit histories.

In dealing with customers in arrears, the FSA has called on firms to be flexible, to make sure they consider customers' individual circumstances and to use court action as a last resort.

Lesley Titcomb, FSA director responsible for the mortgage sector, said: "As our data shows in these current market conditions more people are struggling to meet their mortgage payments and it is vital that firms treat them fairly.

"This means paying attention to their individual circumstances and not repossessing their homes when there may be an alternative solution. Repossession has to be the last resort."

The FSA has put in place a programme of actions to address the problem which includes a closer examination of charges, in particular the circumstances in which fees are levied and whether they are compatible with the regulator's principles for treating customers fairly (TCF).

Other recommendations are: referring lenders for enforcement; ongoing supervision to ensure lenders improve their arrears handling; and supporting the Civil Justice Council in its proposal for a pre-court protocol.

A total of 13 mainstream and specialist lender brands (including impaired credit, buy-to-let, and self-certification) were reviewed for the thematic work which looked at arrears and repossessions practices over the last few months.

The FSA said that mainstream lenders were largely complying with its requirements and had policies and practices in place that should ensure customers are generally treated fairly. However, the regulator raised concerns about specialist lenders.

It found that they operated a 'one size fits all' approach, focused too strongly on recovering arrears according to a strict mandate, without reference to the borrower's circumstances. The FSA said specialist lenders were also too ready to take court action, and had lower standards of systems and controls in place to control mortgage arrears handling, including training and competency arrangements.

The FSA found that in general, lenders could have done more to consider customers' individual circumstances and offer more options to resolve the arrears position and imposed charges in circumstances that could result in the unfair treatment of customers.

However, the Intermediary Mortgage Lenders Association (IMLA) has strongly contested the FSA's findings, in particular its suggestion that all specialist lenders systematically operate a 'one size fits all' approach to arrears management.

Peter Williams, executive director of IMLA, said: "All IMLA members adhere to MCOB 13 rules and regulations as set out by the FSA meaning they treat borrowers in difficulty as sympathetically as possible.

"While lenders clearly have to make commercially viable decisions when managing arrears, keeping people in their homes is preferable in a market such as this."

"By repossessing assets and selling them at a discount to their book value because of falling house prices, lenders could crystallise their losses. In some situations, however, delaying an inevitable sale of the property means the debt will continue to rise with no realistic chance of the borrower ever clearing it.

"Specialist lenders are committed to taking account of the interests of both customer and lender through open dialogue between the two parties, who both stand to benefit from finding alternative means of managing arrears and avoiding possession if at all possible," he added.

Figures published by the Council of Mortgage Lenders (CML) suggest that repossessions will rise by more than 50 per cent this year to 45,0000, up from 27,100 last year.