The chief executive of the Financial Services Authority (FSA) has called the end to an era of cheap borrowing by British banks, predicting that lenders will now avoid complex financial products in favour of old-fashioned relationship banking.

Mr Sants made his comments on the eve of the publication of an internal review into how the FSA handled the Northern Rock crisis, the Newcastle-based lender that has been nationalised.

The report, commissioned by Mr Sants and headed by Rosemary Hilary, the FSA's director of internal audit, will be presented to the regulator's board tomorrow.

Mr Sants has admitted that although the FSA identified the risks in Northern Rock's business model, it failed to communicate adequately the potential problems and to force the mortgage lender's management to address the risks.

Speaking at a conference for retail lenders today, Mr Sants said of the report: "I can now say it will show that the supervision of the company did not meet the standards I would expect of the FSA, although I should also say that it is by no means necessarily the case that more active supervision on our part would have prevented what later occurred.

Mr Sants, who became chief executive of the financial regulator last July, just before the global credit crunch took hold and the Northern Rock crisis broke, told the BBC today: "Banks themselves need to give consideration to how their business models will need to adapt to the changed market circumstances they have seen.

"Secondly, we will be looking for firms to treat their customers fairly in these arguably more difficult times in prospect."

Over the past three to four years, banks have been able to borrow billions of pounds at historically low rates, resulting in lenders passing on cheap lending rates to companies.

However, a rise in borrowing means that many companies are saddled with large debts they are struggling to refinance in a cautious market with no appetite for risk.

Mr Sants said: "I don't think markets are ever going to return to where they were. The idea that at some point they will go back to normal, I think, is a misnomer.

"The new normal will be different from the way markets behaved in the past."

He also predicted that banks would shy away from pushing complex financial products on to their customers, and instead get know their clients in the long term, suggesting that, in the past, bankers had been motivated to sell higher-risk products to secure big bonuses.

Mr Sants said: "There is a risk that the remuneration systems are too short-term and that they do incentivise behaviour which is not helpful in terms of maintaining long-term financial stability."

Since last year, complicated products backed by sub-prime mortgages have cost banks billions in writedowns, sparked by the sub-prime crisis in the US housing market.

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