British mortgage lenders may be warned by the Chancellor of the Exchequer, Mr Gordon Brown, to pass on bigger interest rate cuts to borrowers or face possible statutory regulation, it emerged today.

Banks and building societies have recently come under fire for not passing on to their mortgage customers a string of interest rate cuts from the Bank of England.

The Chancellor is soon expected to publish a consultation paper on the mortgage industry which is likely to suggest obligations on mortgage rates.

A Treasury spokesman said: "There will be an open consultation document before the end of next week and one issue likely to come up is whether mortgage lending should have statutory legislation.

"Companies and individuals will have an opportunity to set out their views."

The Chancellor is said to be unhappy that banks and building societies did not pass on to consumers the full 0.25 per cent rate cut, introduced in June.

Most organisations only passed on 0.05 per cent to 0.15 per cent of the cut.

The majority of banks and building societies pointed out the need to maintain competitive savings rates.

A spokeswoman for the Alliance & Leicester, said: "A lot of funding for our mortgages comes from our savings customers.

"Following the last Bank of England base rate cut we have reduced our mortgages by 0.1 per cent and today announced our savings rates have also fallen 0.1 per cent "Keeping mortgage rates in line with the Bank of England base rate is only half the issue. If interest rates were rising, would we be asked to put our rates up in line with increases?"

The Bank of England rate stands at 5 per cent, the lowest rate for over 30 years, but some mortgage lenders have recently dropped their savings rates by larger amounts than their borrowing rates.

The majority of banks and building societies said they would welcome consultations with the Government on the whole issue of interest rates.