The UK financial watchdog has admitted it failed Northern Rock during last summer’s global financial instability.

A report from the Financial Services Authority (FSA) accepts its supervision of the then fifth-biggest mortgage lender in Britain was ‘unacceptable’.

Northern Rock was nationalised earlier this year after being forced to seek emergency funding from the Bank of England following the collapse of the US subprime market.

Last week it was confirmed that 2,000 jobs will be shed at the firm over the next three years.

The FSA’s chief executive Hector Sants commissioned an internal audit review into Northern Rock’s collapse in October last year.

It questions the “quality, intensity and rigour of the firm’s supervision” but claims if the FSA had acted in an “acceptable” way the outcome would have been unchanged.

The review claims the board and managements of high-impact firms such as Northern Rock “carry the primary responsibility for ensuring their institutions’ financial soundness”.

But it acknowledges the FSA should have done more to identify Northern Rock’s “business model vulnerability” from changing market conditions.

The review recommends new supervisory specialists be appointed to high-impact firms and an increase in supervisory training.

There will also be a “raised emphasis” on assessing the competence of firms’ senior management, Mr Sants revealed.

“It is clear from the thorough review carried out by the internal audit team that our supervision of Northern Rock in the period leading up to the market instability of late last summer was not carried out to a standard that is acceptable, although whether that would have affected the outcome in this case is impossible to judge,” the FSA chief executive said.

Mr Sants warned the package of measures introduced by the Tripartite Authorities to prevent a similar situation would not mean a “no failure” regime.

“However, together with the proposed reform of the insolvency regime for banks – and an improved deposit protection scheme – it creates a platform to strengthen financial stability and better protect the interests of consumers,” he continued.

“Demonstrating our willingness to examine ourselves critically and learn lessons is central to giving the financial services industry and consumers confidence in the FSA, although, like any organisation, we cannot and do not claim infallibility, and we cannot, and should not, attempt to remove all risk from the system.”

Rosemary Hilary, director of internal audit of the FSA, added: “Our recommendations are designed to ensure that the framework is properly applied, with good record-keeping, good information flows, the appropriate levels of challenge and the right amount of engagement and supervision of front-line staff by management.”