The Financial Services Authority (FSA) has cracked down on the sub-prime mortgage market by fining two rogue lenders and shutting down another one.

The City watchdog accused the companies of giving risky advice to borrowers with poor credit records and found failures in record-keeping that could have led to lending too much to borrowers who could not afford repayments.

One company – Next Generation Mortgages - failed to explain the risks of mortgages to borrowers. Another – Homebuyer Securities – employed unqualified advisers.

The Loan Company, trading as Greenhill Finance, was fined £31,500, while Next Generation Mortgages was fined £10,500 and banned from selling self-certification loans again by the regulator. Homebuyer Securities has been banned from trading and a director at the firm was told that he can never work as a mortgage broker again. The three lenders were also ordered to review customer files and issue refunds where necessary.

The move comes at a time when lenders are under increasing pressure to reduce their exposure to risk by cutting down on sub-prime lending. These deals target borrowers who have had credit problems in the past, for instance by missing mortgage, credit card or loan repayments.

Fears over sub-prime lending in Britain began after the collapse of the sub-prime market in the United States sparked the global credit crunch.

The crackdown is part of an investigation by the FSA into the sub-prime mortgage sector, estimated to account for around 9 per cent of the total market. In July, the FSA said that it had referred five firms for further investigation.

Margaret Cole, the watchdog’s director of enforcement, said: “Firms who do not comply with FSA standards taint the entire mortgage industry which is totally unacceptable.”

Since the summer’s credit squeeze, some sub-prime lenders have gone into administration, while a number of others have stopped offering sub-prime loans altogether.