The Financial Services Authority (FSA) has fine Morgan Stanley £1.4m for failing to prevent a rogue trader from causing $120m (£79m) loss for the firm’s customers.

The trader himself, Matthew Piper, was also fined £105,000 and banned from working in the City by the regulator.

The fine is the 10th-largest ever handed down by the FSA and follows an investigation in June last year.

Piper worked on the investment-grade trade desk at Morgan Stanley, overseeing the bank’s money to take bets on complex financial instruments.

He was said to be an expert in default swap indices and credit default swap indices, which are used to gauge the likelihood of companies going bust.

Morgan Stanley was forced to admit last June that a rogue trader had forced it to take a loss. The bank’s figures included a reference to “$120m negative adjustment to marks previously taken in a trader’s books that did not comply with firm policies”.

Margaret Cole, the FSA’s director of enforcement, said: “Market confidence is likely to be damaged by sudden and unexpected write-downs and revaluations of securities. Firms must take care to ensure their traders operate within a proper control environment. Financial instruments must be priced correctly by traders, particularly in more challenging conditions and when it comes to illiquid products,” Cole said.

“Piper has been banned because his misconduct was deliberate, frequent and repeated over a six-month period. He was a senior and experienced trader who held a position of trust at the firm. This was clearly a serious breach of the standards of behaviour we expect of approved persons.”

The FSA said Piper hid losses by deliberately altering the way he reported his trades.

Morgan Stanley was found not to have used the controls it had in place to measure the trades while it was also accused of failing to react quickly enough to changing conditions in the credit markets.

If it had made changes to its internal controls it would have realised that Piper was mis-marking his positions more quickly, the regulator said.

The FSA went onto say Piper’s actions demonstrated a lack of honesty and integrity “such that he is therefore not a fit and proper person to perform functions in relation to regulated activities”.

The FSA added: “The mitigating effect of his early admissions as to his misconduct and his co-operation with Morgan Stanley and the FSA since then is tempered by the fact that the [firm] had already begun to raise questions on certain of his positions.”