Treasury Select Committee accuses new FSA heads of protecting 'old boys' network'

Britain's most powerful financial watchdog was yesterday accused of being too "cosy" with companies it is supposed to be policing.

MPs on the influential Treasury Select Committee also accused John Tiner and Callum McCarthy, respectively the new chief executive and chairman of the Financial Services Authority, of propagating the City's "old boys' network" in the way they ran the body.

The accusations came as the FSA revealed its investigation into split capital investment trusts had been scaled up, with 21 companies now potentially in the frame for allegedly operating a "magic circle" by investing in each other's trusts.

In an aggressive meeting, the MPs demanded to know why Lloyds TSB was fined only £1.9m last month by the FSA for selling so-called "precipice bonds" to thousands of customers. This compares with far heftier financial penalties handed down by other regulators, such as the £17.3m fine slapped on Argos in February by the Office of Fair Trading after it was found guilty of fixing the price of Hasbro toys.

James Plaskitt, MP for Warwick and Leamington, said: "[I think] £17m for price fixing toys but £1.9m for Lloyds ... sounds cosy and clubbish."

Callum McCarthy, making his first appearance before the committee as chairman of the regulator, said the "loss of reputation" companies suffered when they were reprimanded for mis-selling was where the FSA "really had leverage". He added that Lloyds had also been forced to pay out £98m in compensation.

Mr McCarthy was made to defend his decision to allow Sir Andrew Large, deputy governor of the Bank of England, to continue to be a non-executive on the FSA's board. Sir Andrew is also a warden of Winchester college. The OFT is investigating allegations of fee-fixing among Britain's top independent schools. George Mudie, MP for Leeds East, said Mr McCarthy's willingness to accept the Bank of England's support for Sir Andrew as sufficient grounds to allow him to carry on being an FSA non-executive was evidence of "an old boys' network".

The FSA has been working hard on a number of instances of market abuse and has 13 or 14 cases at an "advanced stage", Mr McCarthy said. One of those is believed to be with Paul Davidson, nicknamed "the plumber", who is being investigated by the FSA after he placed a spread bet on the flotation of his own company, Cyprotex, in February 2002.

Mr McCarthy - a former head of electricity regulator Ofgem - expressed frustration at not being able to bring those guilty of market abuse to book more quickly and signalled that the FSA had asked the Government to speed up the process whereby it enforces penalties. He said: "The system gives rights to the individuals and companies involved, which they use to the full. I have a feeling that justice delayed is justice denied."

Mr Tiner, who headed the FSA's insurance division before taking over as chief executive, refused to give a timetable for when the FSA expected the split-cap investigation - its most high profile to date - to be wrapped up. The FSA plans to interview 70 figures among fund managers and brokers, some under caution.