The City's watchdog met executives of Northern Rock only eight times in the two years before the Newcastle-based bank imploded — with two of the meetings done by phone and another five completed in a single day.

That was one of a catalogue of errors revealed by the Financial Services Authority (FSA) yesterday as it published a review of its dealings with the troubled bank.

Hector Sants, the FSA's chief executive, admitted that the regulator's supervision of Northern Rock was unacceptable, but did not apologise for the FSA's part in Britain's first bank run in more than a century.

Mr Sants and Sir Callum McCarthy, the FSA chairman, will appear before the Treasury Select Committee on May 6. Yesterday John McFall, the Labour MP for West Dunbartonshire, who chairs the committee, called into question the abilities of the FSA's management. “This isn't just a failure of the supervisors of Northern Rock, it's a failure of the management of the FSA,” Mr McFall said.

Bankers and legal experts expressed amazement at the FSA's blunders. Simon Morris, a partner who specialises in financial regulation at CMS Cameron McKenna, the law firm, said: “The FSA's supervision of Northern Rock was rubbish. 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.”

Sources compared the FSA's performance with that of Citigroup, which was fined £1.3million by the regulator in 2005, in part because its managers had failed to prevent traders from using a risky trading strategy. Mr Sants, then managing director of the FSA's wholesale business, said at the time that he expected Citigroup's top executives to have better systems and controls over their underlings.

Yesterday Mr Sants admitted that the supervisors responsible for monitoring Northern Rock had been below standard in their “engagement and oversight” of the bank, that the regulator's heads of department had not actively sought information from the supervisors and that the relevant FSA directors had failed to monitor their department heads and supervisors.

The only senior head to roll over the debacle so far is that of Clive Briault, the FSA's retail head, who left the watchdog by “mutual consent” last week.

David Cameron, the leader of the Opposition, used the regulator's embarrassing report to call for the FSA to be stripped of responsiblity for monitoring Britain's banks. The Bank of England should take over the job, he said.

However, the Prime Minister insisted that Britain was still better protected against financial instability than other countries. Gordon Brown said: “If you now look around the world and see what happened to Bear Stearns, see that three banks have fallen in Germany, what happened to Société Générale in France, then you will see we have been better protected than other countries against the global financial turbulence.”

The internal audit of the FSA's dealings with Northern Rock looked at the period from January 1, 2005, to August 9, 2007 — finishing shortly before the bank begged the Bank of England for an emergency loan. The Rock has since been nationalised and its £100billion in liabilities taken on to the Government's books.

The raft of failures uncovered by the regulator's internal auditors were:

— For 12 months Northern Rock was monitored by supervisors with expertise in insurance, not banking;

— Over the 2 years, three department heads had responsibility for Northern Rock. The FSA's review found that only one other bank had experienced such a high turnover in the same period;

— Formal records of supervisors' meetings with the FSA's risk assessment panel to discuss Northern Rock were not kept, nor did supervisors give the panel any “developed financial analysis” on the bank;

— The panel agreed to allow the supervisors to lengthen the period between the bank's assessments from 24 months to 36 months;

— Northern Rock's supervisors did not understand what close and continuous (C&C) supervision entailed and kept only one partial record from eight C&C meetings with the bank;

— The supervisors failed to enter any details into the FSA's database on the risks presented by the bank, or how those risks were worsening;

— The supervisors and the panel did not issue the bank with a risk-mitigation programme (RMP) that would have forced it to address its risks. Northern Rock was the only bank monitored by the FSA without an RMP.

In its defence, the FSA said that the bank had been an “outlier” with an unusual business model. It admitted that the review had found similar defects in the FSA's supervision of a few other mid-sized banks but said, effectively, that the monitoring of the bank was unusually bad. “Our overall conclusion is that the supervision of Northern Rock was at the extreme end of the spectrum,” the review said.

Banks can expect supervisors to be more challenging about the “vulnerabilities of their strategic plans”, while more time will be spent by FSA department heads of looking at their supervisors' decisions.

The review also said that so-called “high-impact” companies, such as Northern Rock, will have continuing assessment according to the risks identified by the FSA risk panel and will be questioned by the panel on liquidity. High-impact companies must submit to an annual review of their business plan and the FSA will give specific individuals the task of comparing firms to their peers, a role previously not assigned.

Successes and low points in a decade of regulation

1997 Financial Services Authority created. Takes the roles of nine self-regulating bodies and gains new legal enforcement powers. It now exercises powers given to it by the Financial Services and Markets Act 2000. Took on responsibility for mortgage businesses in 2004 and general insurance in 2005

2001 Ronnie Baird, FSA director of internal audit, criticises FSA and Treasury handling of Equitable Life crisis, concluding that they failed to spot key problems

2002 FSA fines Legal & General £1.1 million for widespread mis-selling of mortgage endowment policies between 1997 and 1999

2002 Consumer group Which? accuses the FSA of being “asleep on the job” over endowment mis-selling

2004 FSA fines Shell £17 million for mis-stating reserves

2005 Financial Services and Markets Tribunal ruled L&G fine too high — reduced to £575,000

2005 The Association of British Insurers (ABI) calls on FSA to improve its investigations after L&G has mis-selling fine cut.

2005 FSA fines Citigroup £13.9 million for involvement in controversial Eurobond trade

2005 Tony Blair criticises FSA for harming businesses. Callum McCarthy, chairman, asks Blair to explain or retract comments

2006 Which? criticises the FSA for failing to protect consumers 2006 FSA fines London investment banking arm of Deutsche Bank £6.3 million and one its traders £350,000 for improper market conduct over Swedish lorrymaker Scania

2006 Paul ‘The Plumber' Davidson wins appeal against FSA after it tried to fine him for market abuse for a spread bet he made in 2002 on the shares of Cyprotex, a company he was floating

2007 FSA closes five-year investigation into the split capital investment trust scandal without charging or fining any companies or individuals. However, in December 2004 it secured £194 million settlement fund to compensate investors burnt by the scandal

2007 Alistair Darling, the Chancellor, criticises FSA over its crisis-management of Northern Rock

2007 FSA fines Norwich Union £1.26 million after security failures at its call centres allowed fraudsters access to policyholders' details and put almost seven million customers at risk of financial fraud

January 2008 Treasury Select Committee criticises FSA over collapse of Northern Rock

March The Times reveals that five of the seven FSA supervisors responsible for flawed supervision of Northern Rock have quit

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