THE Financial Services Authority (FSA) is headed for a showdown with MPs after awarding staff a 40 per cent bonus increase despite admitting to having failed in its regulatory duties in the run-up to the banking crisis.<br /><br />The City regulator doled out staff bonuses last month worth &pound;19.7m, it emerged yesterday, prompting questions from politicians about what FSA employees had done to deserve the hike.<br /><br />The FSA bonus row comes after it emerged that it anticipated the downfall of Northern Rock in &ldquo;war games&rdquo; played in 2004. Despite this foresight, the FSA&rsquo;s own report into the collapse of the Rock showed that it did not pay enough attention to the warning signs ahead of its actual collapse.<br /><br />John Thurso MP, a member of the Treasury select committee, said the group of MPs would demand evidence of how the FSA had improved when its chief executive Hector Sants next comes before them.<br /><br />&ldquo;If they have brought in better people and they&rsquo;re doing a good job then that would be reasonable. But at a time when pay restraint is being urged, it sends a dubious message unless the FSA can demonstrate that these bonuses are fully merited and fully justified,&rdquo; he said.<br /><br />The regulator warned earlier this year that it would pay out around &pound;20m in bonuses to attract talented staff, despite a period in which its own internal review identified a &ldquo;systematic failure of duty&rdquo; with regard to Northern Rock.<br /><br />But Matthew Elliott, chief executive of the Taxpayers&rsquo; Alliance, said yesterday the regulator had not performed well enough to justify the payouts. &ldquo;It has hardly been a glorious year for the FSA, so the idea that the clowns who work there are getting huge bonuses will surprise taxpayers.&rdquo; He added that the freeze on pay at many financial groups meant that the FSA did not need to increase rewards by so much to attract staff.<br /><br />Liberal Democrat Treasury spokesman Vince Cable said the payouts would be &ldquo;rewards for failure&rdquo;, highlighting the comparison with below inflation pay deals for teachers and nurses.<br /><br />Philip Hammond, Conservative shadow chief secretary to the Treasury, added his voice to the criticism, saying that the FSA's decision on bonuses &ldquo;seriously undermines its authority to do the job it has been charged with&rdquo;.<br /><br />But the FSA pointed to the increased demand for staff skilled in risk management as a factor behind the bonus hike.<br /><br />&ldquo;The particular set of skills we need are very much in demand .&rdquo;