Watchdog: No more 'soft touch' regulation

Lord Turner, the head of the Financial Services Authority, said the regulators had been "over-deferential" and would intervene more in future.

He served notice that there would be a more heavy-handed regime and that fees charged to the big financial institutions would rise so the FSA could hire a new generation of well-paid "poachers turned gamekeepers" to probe the books.

"There will be more people asking more questions, and getting more information than we were getting before," he said. "There is no doubt the touch will be heavier. We have to make sure it is intelligent and focused on where the risks really are."

He admitted that the FSA had been too nervous of being accused of undermining the Square Mile's competitive edge. "We are now in a different environment," he said. ''We shouldn't regulate for its own sake, but over-regulation and red tape has been used as a polemical bludgeon. We have probably been over-deferential to that rhetoric."

The comments of Lord Turner, a former CBI chief and Government pensions adviser, will be seen as an admission that the financial regulation system put together by Gordon Brown a decade ago has failed to do its job adequately.

In interviews with The Guardian and the Financial Times he suggested there had been inadequate investment. "Bluntly, we have been doing supervision on the cheap," he said. That would now have to change: "We'll have more people looking at the high-impact, systemically important firms with major knock-on effects than we did before.

"We will pay more than necessary to attract the correct quality of people from outside. Poachers turned gamekeepers are very attractive to hire."

Lord Turner said it was time to "wipe the slate clean" and debate reforms such as new rules and definitions of banks' minimum capital reserves as well as bonus structures and mark-to-market accounting. "One must avoid saying it must all be about bankers' bonuses," he cautioned.

Shadow chancellor George Osborne said Lord Turner's remarks were "a damning indictment" of the Government.

He said: "Lord Turner is absolutely right about wiping the slate clean. We have been calling for many of the changes he suggests, from new capital rules to reform of mark-to-market accounting and a better-funded regulator."