The head of the Financial Services Authority (FSA) admitted today that its handling of Northern Rock, the collapsed mortgage bank, had been unaccepatable as the regulator laid out a raft of plans to beef up its supervisory staff and put in place new procedures to prevent a repetition of the crisis.

In a highly anticipated internal review of its handling of the affair, the FSA conceded that the "quality, intensity and rigour" of oversight by its management had been inadequate.

It said that its supervisory teams had failed to follow up with Northern Rock on the vulnerability of its business model as the credit crisis took hold last summer.

Resources were inadequate and managers failed to ensure that all available "risk information" was seized upon to help to prevent an impending crisis, the regulator said.

Hector Sants, the FSA's chief executive conceded the watchdog's handling of the affair was "not carried out to a standard that is acceptable". But he added that had its supervision been better, the regulator still might not have prevented the Rock's ultimate downfall.

He said: "It is clear from the thorough review carried out by the Internal Audit team that our supervision of Northern Rock in the period leading up to the market instability of late last summer was not carried out to a standard that is acceptable, although whether that would have affected the outcome in this case is impossible to judge."

Northern Rock collapsed last year after the wholesale funding market — on which it was reliant for more than 75 per cent of its funding — dried up in the wake of the sub-prime mortgage crisis in America. It was thrown a £25 billion lifeline by the Government and earlier this year the bank was nationalised after lengthy attempts to sell it failed.

The FSA, along with the Bank of England and the Treasury, has been widely criticised for its failure to act quickly enough to fend off what became one of the most high-profile and embarrassing crises in UK banking history.

The City regulator said that it would introduce a new group of specialists to review the supervision of what it called "high-impact firms" with the number of staff monitoring each firm increased from previous levels.

It said the risk department of the FSA would be expanded and supervisory training would be upgraded, with the number of management involved in direct monitoring increased.

There will also be greater focus on liquidity, it said, particularly in the supervision of high-impact retail banks such as Northern Rock. The FSA had been criticised in the past for focusing too much on a bank's profit and loss accounts and not enough on its overall liquidity position which, in the case of Northern Rock and other retail banks, is a much better indicator of its overall health.

But the FSA stopped short of issuing an apology.

Yesterday, Michael Fallon, Conservative MP for Sevenoaks and a senior member of the Treasury Select Committee that grilled Mr Sants over the affair, had called for the regulator to say sorry for its role in the Rock's downfall.

He said that the report must contain the word "sorry" as well as a declaration of failure.

"They failed in their duty," Mr Fallon said. "There were too few people regulating a very large bank and they didn't pay enough attention to liquidity issues."

Mr Sants said: "Demonstrating our willingness to examine ourselves critically and learn lessons is central to giving the financial services industry and consumers confidence in the FSA, although, like any organisation, we cannot and do not claim infallibility, and we cannot, and should not, attempt to remove all risk from the system."

Mr Hants sought to describe the FSA's handling of the Rock as actions "at the extreme end of the spectrum", although one lawyer dismissed those claims as "rubbish".

Simon Morris, of CMS Cameron McKenna, the law firm said: "If a major firm regulated by FSA were to operate with such poor management oversight and such weak systems and controls, then FSA would have shut it down by now".

In a move widely seen as a attempt to deflect criticism over the affair, the FSA last week ousted Clive Briault, its retail chief and the man responsible for overseeing the regulation of the Rock.

No other senior regulator or politician has lost office because of the affair.

Earlier this month, the Government submitted a business plan for Northern Rock to the European Commission. In order to press ahead with the nationalisation, the Government has to show that the Rock will be drastically reduced in size and will not have any competitive advantage

British prime minister Gordon Brown said recently he expects to make progress “very soon” with the EU on the government’s restructuring plans for the nationalised

UK lender.

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