A sharp surge in mortgage lending by investment banks and brokers to risky customers with poor credit records has prompted the City regulator to identify the growing trend as a priority area of concern.

The “sub prime” market is estimated to have grown to up to £30bn a year as an influx of new entrants such as investment banks West LB, Investec and Deutsche, poured into the market joining existing players such as Lehman, GMAC and Merrill Lynch.