FSA chairman Lord Turner has told building societies to “stick to their knitting” and not extend beyond their core services.
He told the Treasury select committee on Tuesday that building societies should avoid getting involved in riskier product areas.
He said: “I think the biggest mistake we made was to allow our mutual sector, in some cases, to extend beyond the core business of prime real estate lending.
“I think there is an unfinished part of our regulatory agenda as to whether we should reverse some of the liberalisation of the building society rules which took place in the 1980s and 1990s.
“In relation to building societies, which are organisations which can only have a skill set across a limited range of activities, they should stick to their knitting.”
FSA chief executive Hector Sants told MPs there are “two or three” firms currently applying for retail banking licences.