The Financial Services Authority was accused of hypocrisy yesterday after it emerged that it had blocked an attempt last April by institutional investors in Royal Bank of Scotland to vote against Sir Fred Goodwin, then the chief executive.

An FSA veto of a proposal to put all RBS directors up for re-election ensured that Sir Fred did not have to stand. He went on to run RBS for another six months, qualifying for the controversial doubling of his pension into the bargain.

A senior institutional investor said that the affair needed to be made public given the attack this week by Hector Sants, the FSA chief executive, who criticised institutions and non-executive directors for failing to hold bank executives to account. “When we tried to hold individual directors to account last April, the FSA intervened to prevent it,” the investor said.

Although it is thought unlikely that Sir Fred would have been voted out at that time, investors would have been able to vent their anger - at least by abstaining - over his catastrophic decision to buy ABN Amro.

The FSA declined to comment yesterday but The Times has established that it did reject the proposal on the grounds that a mass rebellion against the entire board could have further destabilised the bank.

Big investors asked Sir Tom McKillop, the RBS chairman at the time, to change from three-yearly director elections to annual elections when RBS was forced into a £12billion rights issue, the first of its two giant capital-raisings last year. The RBS board agreed to put the proposal to the FSA.

Sir Fred was last re-elected by shareholders in 2007 so was not due for re-election until next year. He was replaced by Stephen Hester in November after RBS was forced to tap the Government for £20 billion in rescue capital.

The FSA appears to have softened its line since, allowing Barclays to put all its directors up for re-election at its annual meeting next month. Barclays announced the concession in November when faced with shareholder anger over its decision not to give them first refusal on a capital-raising but to tap Gulf investors instead.

The FSA said yesterday that it could not comment on individual cases but added: “We are generally supportive of annual re-elections.”

Lord Myners, the City Minister, echoed Mr Sants's sentiments about the failings of institutional investors in a speech to pension fund managers yesterday. They had failed to hold management to account, he said.

Mr Sants followed his broadside against institutional investors with a fresh promise yesterday to impose a much more intrusive style of regulation on the City in future. “There is a view that people are not frightened of the FSA. I can assure you that is a view I am determined to correct. People should be very frightened of the FSA,” he said in a speech.

The FSA would be much more judgmental of the strategic decision-making of banks and brokers in future and much less prepared to rely on official information from them.

“In the future we will seek to make judgments about the judgments of senior management [of authorised companies] and take actions if in our view those actions will lead to risks to our statutory objectives. This is a fundamental change,” Mr Sants said.

There would be more “mystery shopping” and branch visits, he added, warning that there were several criminal prosecutions of insider dealing cases in the pipeline.

City lawyers said Mr Sants's comments marked a dramatic change in the rhetoric from Canary Wharf. However, Simon Morris of CMS Cameron McKenna played down the substance of the remarks.

“The FSA's overriding objectives remain the same,” he said. “What is new is a greater emphasis on prudence and on 'prove it' rather than just 'show me', but to bill this as a sea-change is over-selling.”

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