• Advisers who help their customers pay less tax could be fined or struck off under watchdog’s new code of conduct
• FSA chief defends regulator’s record during recent crisis and says its culture has been transformed

Bank bosses who allow their firms to devise schemes to help customers avoid paying tax could face sanctions from the Financial Services Authority.

The City regulator is considering its position on the government’s new code of conduct on tax after Nigel Harper, banking adviser at HM Revenue & Customs, took the unusual decision of raising the matter the regulator’s annual public meeting today.

The code, which is out for consultation, is intended to be voluntary and is designed to save the taxpayer billions of pounds lost through complex but legal avoidance schemes operated by some banks.

The government has already said bank that refuse to sign up or act against the “spirit” of the current tax laws will be subjected to heavier scrutiny from HMRC.

Until today the FSA’s involvement had been unclear. Harper told the packed meeting in the City that he was particularly referring to the structured finance operations of banks, which often specialise in tax planning, when he asked whether individuals employed by banks not signing up to the code would still be considered “fit and proper” under the FSA’s rules.

The FSA authorises people to work in the City on the basis that they are “fit and proper”. It has the power to strike individuals off the register or fine them.

Hector Sants, chief executive of the FSA, said the topic was likely be included in a consultation on the FSA’s “fit and proper” test, which is expected in the autumn.

The FSA has not yet reached any conclusions on how it will handle the voluntary code. Sants said: “I’m sure [the consultation] will pick up on HMRC codes and any other codes”.

Lord Turner, the FSA chairman, said: “The whole overlap between tax and regulatory arbitrage and the fit and proper test is one we are still thinking about.” Turner also said the regulator was encouraging banks to have simpler operational structures, noting that international banks had “extremely complicated legal structures”. “It is a very complicated area. We are not a tax enforcement agency,” he said.

HMRC also noted that the FSA did not have tax enforcement powers and was forced to stress that Harper was attending the meeting in a personal rather than professional capacity.

“HMRC already has very good relations with the FSA, we talk about a range of issues of mutual interest, including the code of practice on taxation for banks,” HMRC said.

Turner warned that the uncertainty surrounding the future of the regulator, created by Gordon Brown when he was chancellor, was affecting recruitment and the implementation of changes that were needed after the worst financial crisis since the Great Depression. The shadow chancellor, George Osborne, announced on Monday he would disband the FSA and give more powers on bank regulation to the Bank of England.

“It would be idiotic to deny that uncertainty is a complicating factor. It is a challenge for us to maintain focus on what really matters,” Turner said.

Sants insisted the FSA, after embarking on a more intensive approach to regulation, was “fit for purpose”. Turner added: “I don’t think any other magical organisation out there can do better.”

The chairman has warned the Conservatives how difficult it would be to implement the handover to the Bank of England.

Turner said banks could in some instances be required to hold up “three or five or six times” more capital than they do now to underpin their riskier businesses.

He said the City was only slowly realising the extent of extra capital it might need, citing research by JP Morgan this week which suggested Barclays might need £12.8bn and RBS £8.5bn to meet new rules.

Turner also admitted that the capital requirements might be delayed in some instances because of the recession – a time when banks might ordinarily be allowed to eat into surplus capital.

Sants was forced to defend the FSA’s decision to pay out bonuses to its staff this year. He said: “The marketplace we are hiring from and at risk of being recruited into is highly competitive.”

The FSA has begun interviewing boardroom candidates at banks since the crisis, not only to test their probity but also their competency. Sally Dewar, managing director of wholesale regulation at the FSA, said: “We have seen several potential non-executives withdraw their applications.”