FSA to change its regulatory approach

But the Authority's top brass tough things out in the report, which details its performance against its statutory objectives of promoting efficient, orderly and fair markets, helping retail customers achieve a fair deal and improve its business capability and effectiveness.

Chairman Lord Turner admitted the FSA had made mistakes but argued it has dealt successfully with the immediate crisis and taken action to build a more stable financial system. Chief executive Hector Sants apportioned some of the blame for the economic collapse to business practices of large institutions.

He said: "I recognise that many in society feel let down by the regulatory system and thus the regulator.

"It is critical to understand that the individual firm problems we have seen emerge in the last year had their origins in the boom and were not reversible in the current market conditions.

"Our objectives in the past 12 months have been to minimise the impact of these weaknesses and to lay the foundations of a more effective and better regime for the future."

The FSA has increased its supervisory staff numbers from 526 to 703, reorganised its risk identification and mitigation capacity, increased engagement with auditors and investors to improve oversight of firms, and began judging the competence and regulatory knowledge of senior management. It marks a change in the philosophy.

Mr Sants said: "Previously we focused on ensuring firms had systems and controls and relying on management to make the right decisions.

"We are now focusing on questioning the overall business strategy of the institution and more generally on the possibility of risk crystallising in the future. This is a fundamentally different way of supervising firms.

"We are now making judgements on the judgements of senior management and taking action if, in our view, those decisions will lead to risks to our statutory objectives. We believe this move from regulation based only on observable facts to regulation based on judgements about the future is vital to help us deliver our statutory objectives."

The FSA levied £27.3million of fines during 2008-09, up from £4.4million the previous year, and prohibited 58 individuals from carrying out regulated activities. But it still has to deliver 10 of the 59 targets it set itself at the start of the yar.

The report also defended the "incentive payments", or bonuses, paid to staff from a pot of £19.7million, equivalent to 14 per cent of its 2008 salary bill.

Mr Sants said: "These payments were made only where they were merited and are essential to ensure the organisation can retain and attract the right calibre of staff."

Mr Sants, who was paid £478,000 last year, declined to take his bonus of £130,000.

The full report can be seen at fsa.gov.uk.