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This is even before the cost of any new regulation introduced in response to the current credit crisis.

In the report compiled by business advisory firm, Deloitte, it found that expenditure on regulation and compliance rose by more than 30 per cent in the past three years to an estimated £28bn in 2007.

It also found that this investment in regulation and compliance can only be fully effective if institutions connect their risk management and controls together.

Chris Gentle, associate partner and head of research at Deloitte, said: “It appears that a prime feature of the recent losses incurred by major banks in the credit crunch was the inability, in many instances, to link risk and control factors together.

“Financial institutions are always seeking to find and sustain the correct balance between risk and reward, but this lack of triangulation between control, risk and governance is, in most cases, a missing link which needs joining up.”

The financial services industry has been hit by an avalanche of regulation in the last five years. This has included capital adequacy measures such as Basel II and Solvency II, Treating Customers Fairly and MiFID.

The report also highlighted the differences between large and small financial institutions.

It found larger institutions spend on average four per cent of their total expense base on governance and compliance activities compared with six per cent for smaller institutions.

Gentle, added: “There appears to be a growing and uneven regulatory burden which may act as a competitive disadvantage to smaller financial institutions.”