The caution comes from the new regulator, the Financial Conduct Authority. 

Its FCA Risk Outlook 2013 report warned a combination of uncertainty and increased regulatory requirements could make it difficult for firms to step back and make strategic adjustments to their business model.

It continued: “This could lead to precipitous withdrawal of firms from business areas and products without fully assessing how they could continue to operate within the boundaries of new regulation.

“For example, major firms restricting interest-only mortgages because of concerns about retrospective regulatory judgements on lending decisions.”

While the withdrawal would create an opportunity for niche firms, consumers could suffer in the meantime, it suggested.

With EU as well as British legislation on the horizon, the report predicted the regulatory landscape would become increasingly complex for UK firms.

As well as withdrawing products, the FCA said it needed to ensure firms did not respond to the higher cost of regulation by making cuts in areas of risk management or charging consumers excessively.

The report comes after Accord and the Yorkshire Building Society Group announced it was withdrawing its interest-only residential product range earlier this month while HSBC stopped offering interest-only mortgages to all but its wealthiest customers.