The former director of public prosecutions has hit out at the government, claiming bank fraud poses a greater threat to society than terrorism.

Writing in the Times, Sir Ken MacDonald, who served as director of public prosecutions for five years between 2003 and 2008, also attacks what he calls “the liberty sapping addictions of the Home Office” with its “paranoiac paraphernalia of national databases and identity cards”.

Sir Ken says: “If you mug someone in the street and you are caught the chances are that you will go to prison. In recent years mugging someone out of their savings or their pension would probably earn you a yacht.”

He adds: “Do they really believe that an illiterate mother-of-five drug mule from a village in the Gambia should be serving five times the sentience of a millionaire City fraudster.

“In Britain, no one has any confidence that fraud in the banks will be prosecuted as crime. But it is absolutely critical to public confidence that it should be. The alternative is the worst possible lesson for our national life.”

Sir Ken says the Financial Services Authority should be scrapped and replaced with a tougher independent regulator which can take an informed expert view of what activity to regulate and what to prosecute through the criminal courts.

His comments come as the government plans to shelve proposals for a financial court system which would have had powers to punish fraudsters with a range of criminal and civil penalties, according to the Times, because the proposals would be too expensive to implement.

Instead Baroness Scotland the attorney-general plans to give crown courts greater powers to punish fraudster including longer sentences and a formalised system of plea bargaining. Under the new system a fraudster would admit guilt and might serve time in jail but with the agreement of the prosecution, defence and trial judge would avoid a full-scale trial.