Consumers are more vulnerable to loan sharks and scams during the downturn, the Financial Services Authority (FSA) has warned.

In a report assessing the risks to both businesses and consumers during the recession, the FSA highlighted a potential rise in the number of people turning to loan sharks, or falling victim to fraud as money gets tighter.

“Those in financial difficulty may find themselves unable to use equity in their homes to fund current spending and debt, which may lead to further credit problems.

“Consumers are more likely to default on repayments, maximise unsecured credit lines (such as credit cards) or seek out loan shark debts to fill the gap,” the FSA said in the report.

The credit crunch is also the perfect opportunity for those who prey on desperation, according to the report.

“Consumers should beware of deals which seem ‘too good to be true’. Criminals may try to use the economic recession to their own advantage,” the FSA warned.

A loss of trust and confidence in the industry could also spell long-term problems for the financial services sector.

The FSA said consumers may avoid seeking advice on important matters such as their pension if they no longer have any confidence and the industry needs to address these concerns.

“Rebuilding consumer confidence and trust in financial services will require concerted action from firms, regulators and the government.

“Appropriate access to financial services, fair treatment of customers in distress, and high levels of consumer protection will all help to reduce the risk of longer-term disengagement and distrust in the market. This will be of particular importance this year, as personal finances come under strain,” the report said.