FSA to spend £15m on new recruits after damning Rock report

City watchdog wants another 100 supervisory staff, including City professionals, as internal audit shows up mishandling of bank crisis

The Financial Services Authority is planning to raise its budget by around £15m this year to recruit some 100 new staff following the City regulator's own, highly critical inquiry into the Northern Rock affair.

The budget for this year is £323m, but this will be increased to account for the recruitment that chief executive Hector Sants wants to undertake. Funding for the FSA comes from City institutions, which pay an annual fee to the watchdog.

Sources close to the FSA say that the internal audit undertaken into the Rock collapse highlighted weaknesses in its middle-tier supervisory operations. It is at this level that the FSA wants to beef up its supervisory strengths, by training and improving the quality of its employees.

Insiders said on Friday that the FSA acknowledges the need to hire staff with more serious market-based experience, particularly those familiar with trading risk. This will also mean offering higher salaries to be able to lure some of the City's highly paid practitioners to work for the public-sector body.

At present, the FSA, which employs around 2,000 people, has 506 staff working in its supervisory division. Sources said the regulator estimates it might need another 100 people in this section. It could well be that this figure is lower but that it will seek more expensive staff.

Last week's report from the FSA revealed serious short-comings in the way it policed Northern Rock. Its own internal audit disclosed that only eight meetings took place between regulators and Rock staff from 2005 to 2007 and only one of these was with Rock's former chief executive, Adam Applegarth. That compares with an average of 43 meetings during 2007 alone with the five biggest retail banks. Northern Rock was also the only so-called "high impact" bank – one that takes a great deal in deposits and has a lot of customers – which did not have a risk-mitigation programme in place.

The FSA has also sought to hit back at criticism following its report – which said that "even if supervision had been carried out at a level acceptable to the FSA, it was by no means the case that this would have changed the outcome". Sources at the regulator stand by these words, arguing it is impossible to promise that mistakes won't slip through, however good the regulatory regime.

Mr Sants, who has described his policy as one of "credible deterrence", has made it plain that if the City wants a tougher and much more hands-on regulator which takes braver decisions, then it will have to accept that the FSA will inevitably make some mistakes.

The regulator's next test will be how it handles the inquiry into the "malicious" rumours which led to the 20 per cent crash in HBOS's share price. The regulator is scrutinising more than five million trades relating to the short-selling of the bank's shares two weeks ago, after rumours began in the Far East about the bank's imminent collapse.