MPs said the FSA failed to ring alarm bells over risks being taken
Britain's financial regulator has been criticised for failing to warn savers about risks at the Dunfermline Building Society as it headed towards collapse.
MPs on the Scottish Affairs Committee said the Financial Services Authority (FSA) failed in its duty to protect savers and investors.
The committee also accused Dunfermline managers of keeping its members in the dark about risky lending.
The Dunfermline was forced out of business by regulators last March.
Two days later, the branches, the brand and the Fife headquarters were taken over by the Nationwide Building Society.
The UK Government took on £1.6bn of its more risky liabilities.
The MPs said Dunfermline directors did not give a clear picture of their activities to society members who owned it, including more than 350,000 customers.
The report said they "failed to communicate to them that the moves to diversify into the commercial lending business brought higher risks as well as higher returns".
Those risks included a rapid increase in exposure to the commercial real estate market, as well as buy-to-let mortgages.
The Dunfermline had invested heavily in packages of securities that had bundled up loans made by others.
There was also criticism of the Dunfermline management for telling members in the Members' Review there was "excellent progress" in a new computer system when its managers had instead "lost control and allowed spiralling increases in costs".
However, criticism was also levelled at regulators, and the FSA in particular.
MPs said the regulator "failed to give adequate specific warnings" and it "failed to provide the necessary level of supervision".
"In all these respects, the FSA failed wholly to discharge its duties to protect the interests of investors and savers," the MPs conclude.
There was conflicting evidence given to the committee about the guidance given by the regulator on how much the building society had to increase its capital reserves after the widespread financial crisis struck late last year.
Mohammad Sarwar, chairman of the Scottish affairs select committee, said that the building society had been left "apparently in the dark about the standards which it was expected to meet".
He commented: "One of the primary concerns for any building society must be effective and transparent communication with its members.
"This clearly was not the case at the Dunfermline Building Society and the anxiety and stress visited upon members as a result of misguided decision-making at board level and what was, at best, miscommunication in its annual report is of serious concern."
The Financial Services Authority rejected claims that it failed to provide the necessary level of supervision.
It said that in respect of commercial lending, specific warnings were made on five occasions from March 2003 to May 2008 and the regulator visited the Dunfermline in November 2005.
The FSA said it was in regular contact with the society in 2007 and "was requesting liquidity data on a weekly basis".
The authority said this continued until the society was forced out of business in March 2009.
In a statement it said it "strongly refutes any notion that it failed to adequately supervise the Dunfermline".
There remain 34 Dunfermline Building Society branches in Scotland, operated by the Nationwide.
More than 500 staff transferred, and those working in branches have had jobs guaranteed for three years.
However, the headquarters operation in Fife is being reviewed because there is duplication with Nationwide's HQ in Swindon.
As the second biggest lender to Scotland's housing associations, a loan book worth nearly £500m left with a bridging bank controlled by the Bank of England has also been taken on by the Nationwide.