The City regulator issued a warning to the high street banks yesterday that the "clouds were already darkening" and urged them to prepare for the impact of rising unemployment and the knock-on effect on bad debts.The Financial Services Authority highlighted mortgages based on high multiples to income - as much as five times in some instances - and questioned whether sales of these products would be monitored properly.

Clive Briault, managing director of retail markets at the FSA, said: "While retail banks appear to have adequate financial resources today, the good times will not last forever - indeed, there is evidence that the clouds are already darkening and that banks need to prepare now for the potential storms ahead."

In a speech to the British Bankers' Association, he also urged them to conduct stress tests - essentially worse case planning scenarios - to assess the impact of a downturn in the housing market on the business. The regulator believes banks should consider the impact of a 40% fall in property prices and a 35% increase in the repossession rate on their business but stressed that it does not mean it expects such sharp movements to take place.Mr Briault's comments came as banks were embroiled in a row over moves to end free banking. First Direct, the online and telephone bank owned by HSBC, is facing the prospect of a customer backlash after its decision to levy a