The City watchdog was warned that Icelandic bank Kaupthing was not "fit and proper" to run the UK bank Singer & Friedlander, MPs were told today.
Tony Shearer, former chief executive of Singer & Friedlander (S&F), said he contacted the Financial Services Authority about his doubts in April 2005 during the takeover of the group by Kaupthing.
He said he and fellow directors took "every step that they thought was reasonable" to alert the FSA that they did not think Kaupthing was "fit and proper to run a UK bank".
Overall, five of the seven members of the board made their concerns known in some way.
Mr Shearer told the Treasury Select Committee he left the bank at the end of November 2005 because he was not happy to continue as chief executive under the ownership of Kaupthing.
He said he first became concerned after looking at Kaupthing's public accounts, concerns that he passed on to the FSA, while he also had reservations after meeting the people in charge of the group.
He said: "These were not people that I wanted to work with. I had serious doubts about them right from the start."
Mr Shearer said his concerns related to information that was in the public domain, particularly the group's accounts for December 2004.
In particular, they related to the quality of Kaupthing's earnings, the way the group was managed and corporate governance issues.
He said the majority of Kaupthing's profits were made through a process known as "marking to market", under which assets are revalued in line with current market values, with only around 10 per cent of profits made through banking activities.
The people running Kaupthing were "incredibly young" and "very inexperienced", and there was only one person in the management team who was not from the same community in Reykjavik, he said.
He added that the management had borrowed £90m to buy shares in their own company.
The finance director of S&F and the head of banking both also left the group shortly after Mr Shearer's departure, despite intending to stay on.
The head of risk and the head of compliance were also dismissed from S&F for voicing concerns about the way the company was being managed.
Mr Shearer said these events should have been "red flags" going up to the FSA.
Kaupthing Singer & Friedlander went into administration last year after the UK Government stepped in following the collapse of Icelandic internet bank Icesave, and amid growing concerns about the Icelandic banking sector.
When asked by the Committee why he did not resign as soon as he first had doubts about the Kaupthing management team, Mr Shearer said: "I had an obligation to the shareholders to do the right transaction and get the money for the shareholders. I could not resign and walk out of the door."
He added that he would be in a difficult position if the group had recommended an offer to shareholders, only to have the FSA turn it down.
He said: "It is for the FSA to decide whether they are fit and proper but if you have a view and a feeling you have an obligation to pass on what you think to the FSA."
Mr Shearer said he had written to the chief executive of the FSA, Hector Sants, in 2008 after hearing him say that Northern Rock was the only instance of regulatory failure, to alert him to his concerns about the S&F takeover.
But instead of being invited to "nip round for cup of coffee and a chat" as he had expected, thinking he was doing Mr Sants a favour, he got what was described by one member of the committee as a "rather pompous reply" from someone else.
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