Mortgage lenders and brokers are guilty of giving poor advice to borrowers, the City’s chief watchdog said yesterday.

The Financial Services Authority (FSA) accused nearly 70 per cent of mortgage firms of failing to meet regulatory standards, leaving borrowers at risk of taking out unsuitable loans.

The Watchdog singled out small-sized firms as more likely to give bad advice than their larger counterparts, because they do not have "robust processes" in place.

Larger banks, building societies and brokers are guilty of failing to give consistently good advice, despite having adequate systems in place, it said.

Standards were especially poor in assessing how much customers can afford to borrow and record-keeping. The watchdog said there was scope for improvement in all areas of advice.

A number of the 252 firms investigated face a further probe from the FSA’s enforcement division, but they will not be named until the investigations concludes.

Clive Briault, managing director of retail markets at the FSA, said: "We found significant failings in the advice giving processes in a number of mortgage firms. Poor processes increase the risk of unsuitable advice being given. It is essential that firms have robust processes in place, so that they treat their customers fairly and provide suitable advice."

Mortgage broke called for more guidance from the FSA on how firms can meet its rules.

Rob Griffiths, associate director of the Association for Mortgage Intermediaries, said: "Smaller networks and firms do have work to do, but they had a steep learning curve to climb in meeting the requirements. Whilst firms are responsible for meeting the rules, the regulator also has a role to play in helping firms to understand how to fulfil their regulatory responsibilities."

The criticisms marked the conclusion of a six month FSA investigation into mortgage advice. The FSA began regulating the mortgage industry in October 2004. Last year, it cracked down on rogue brokers who falsely advertise home loans to borrowers with credit problems. It also launched an investigation to assess whether interest-only loans are dangerous.

The Watchdog is due to report on mortgage exit fees and retirement mortgages later this year.