The Financial Services Authority (FSA) was forced to pay out £3.4m in unexpected costs last year after failing to attract enough full-time employees.

The financial watchdog, which the Government plans to replace in a shake up of the regulatory system, said staff costs of £329m exceeded the amount it budgeted in 2010 due to a "higher proportion of contractor staff compared to budget".

The FSA increased its number of full-time employees by 14pc to 3,909 last year in order to "build up its enforcement and supervisory capabilities".

However, "significant levels of project activity" and "challenges experienced in recruiting permanent specialist resources" meant this was still not enough.

City insiders have argued that uncertainty over the FSA's future has meant it has struggled to recruit full-time staff in recent months, causing its reliance on contractors.

The disclosure came in the FSA's annual report, which revealed that fines levied on financial services companies almost trebled t............Click HERE to read more on this story