Hector Sants, new Financial Services Authority (FSA) chief executive, has reinforced the FSA’s view that the UK could be set for an economic downturn.

Speaking at the FSA’s Annual Public Meeting, Sants suggested that the UK was at the “peak of the economic cycle and have been warning banks for some time to prepare for deterioration in the credit markets”.

Sants said the FSA is focusing on ensuring firms have properly tested their business models to ensure they can withstand market volatility.

The concerns follow a number of warnings from Clive Briault, FSA managing director of retail markets, of potentially troubling times ahead for the sub-prime lending market.

In his last speech as FSA chief executive, John Tiner, said: “We have been keeping a close eye on developments and have commented in the past that risk has been under-priced. For us, the key to understand the exposures and the transmission system from investors into the banking sector which underpins financial stability and to be confident that the banks are stress testing these exposures is to test the adequacy of the amount of capital in each firm and the system as a whole.

“At present, we believe the system overall is robust, but this is clearly an area the FSA will continue to watch very closely.”