The head of the Financial Services Authority today admitted that Gordon Brown's City watchdog had failed for ten years to recognise the risky way in which the banking system was developing.

The FSA, which was created by Mr Brown as Chancellor in 1997 when he took responsibility for overseeing banks away from the Bank of England, has come in for widespread criticism for its failure to spot the crisis at Northern Rock, or to predict and prevent the current financial meltdown.

Today Lord Turner of Ecchinswell, who became FSA chair in September 2008, admitted that some of the brickbats were deserved - and hinted that politicians too should share some of the blame.

But despite the admission of guilt, Lord Turner said that staff at the FSA would still be paid an estimated £33 million in annual bonuses.

“With hindsight, the FSA - like other authorities throughout the world - was focused too much on individual institutions and the processes and procedures within them and not adequately focused on the totality of the systemic risks across the whole system and whether there were entire business models, entire ways of operating, that were risky,” he told BBC1’s Andrew Marr Show.

“That’s with hindsight, but remember it is with hindsight and there weren’t many people who got it right at that time. That’s a legitimate criticism.”

Lord Turner suggested that the failure had extended as high as Downing Street, with politicians allowing themselves to become “fascinated” by the apparent expertise of financiers.

“Over the last 10 years there probably was too much of a fascination with what you could call finance capitalism, and a failure to realise the risk that was emerging,” he said. “Perhaps at the end of it there will be less fascination.”

Kenneth Clarke, the Shadow business secretary, said today that there had been a “complete failure” of the tripartite structure of Bank, FSA and Treasury set up by Mr Brown.

“Gordon destroyed the previous system - we don’t know whether that would have worked - but the one he put in place was useless, totally useless, and it is important to get back to regulation,” Mr Clarke told Sky News Sunday Live.

He accused the FSA of adopting a "box-ticking" approach to regulation. "What they were not being regulated properly on was the big risks they were taking. Prudential regulators should have been addressing the business models, the risk-taking, making sure that depositors in the banks, shareholders and the financial system were not being put at risk.”

Asked if he would apologise for the FSA’s failings, Lord Turner avoided issuing a direct 'sorry'. “I am certainly sorry that across the whole world there was a failure to focus on those systemic risks and it was an intellectual failure... The FSA was doing a lot of good work in many aspects, but it - like others - failed to focus on those wider systemic issues,” he said, pointing out that respected international institutions like the International Monetary Fund were writing “paeans of praise” at that time to the very securitisation vehicles which are now blamed for the crisis.

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