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The Financial Services Authority (FSA) said last night that many small and medium-sized financial institutions have insufficient command and controls to prevent them doing business with those on the Government's blacklist of financial sanctions. The list, which is maintained by the Treasury, includes about 1,400 individuals and 500 entities in Britain and abroad. It includes individuals and businesses linked to al-Qaeda, the Taliban as well as North Korea and Iran and people linked more generally to terrorist financing. Providing banking or other financial services to members of the list can be a criminal offence and businesses are required to have sufficient controls in place to avoid this. After surveying 228 financial firms, the FSA concluded: “There is significant scope across the industry for improvement in firms' systems and controls.” Leading financial institutions were also said to be “falling short”. The report highlighted one specific area of ignorance among British firms: a widespread belief that the sanctions applied only to foreign entities and individuals. In fact, the FSA reminded financial businesses that the banned list contains 50 individuals and 12 entities based in the UK. It also said that there was widespread confusion about the sanctions regime, with many firms believing that it took affect only with financial transactions above a certain size and therefore exempted smaller businesses. Another failing was that many firms were screening new clients retrospectively, sometimes weeks after an initial account had been opened, instead of before clients were taken on. The Treasury is responsible for policing firms that break the sanctions, but the FSA's remit includes making sure that UK financial groups have sufficient systems in place to prevent them from accepting blacklisted clients. In a separate speech yesterday Lord Turner of Ecchinswell, the FSA chairman, said that big complex banks should be forced to hold proportionately more capital than smaller ones. He told an audience in New York that he was “open-minded” about the proposal, which was not contained in his review last month on reforming bank regulation but has been suggested by the United States. Lord Turner also appeared to be leaning more heavily towards forcing international banks to keep ring-fenced capital and liquidity in each of the jurisdictions in which they operate, rather than holding a global pot earmarked for anywhere. Both measures could be disadvantageous to British-based banks such as HSBC, Barclays, Standard Chartered and Royal Bank of Scotland, which are all both large and multinational. Lord Turner conceded that there would be a cost to banks, both financial and in extra “hassle”, but said that this was a price worth paying if it prevented future financial crises. “Overall, the value of financial stability needs to be central to our deliberations,” he said. “The cost of the recession we now face — in lost output, in postponed investment and in the human welfare of individuals affected by unemployment and sudden losses in wealth — will be huge.” Lord Turner again ruled out Glass-Steagall type legislation forcing banks to choose between traditional retail/commercial banking and investment banking. He also came out against the philosophy of saying that no bank was too big to fail and that even the largest banks that got into difficulties should be allowed to go bust.