Banks and other financial firms that are subject to enforcement action have avoided shelling out more than a billion pounds in fines over the past four years.
Between 2013 and 2017, financial firms were given discounts totalling £1.2bn by the Financial Conduct Authority, according to figures from think tank New City Agenda.
Without these discounts, companies would have been forced to dish out a total of £4.2bn.
Firms can receive discounts of up to 30 per cent on their fines by settling their case early, but the government is now being urged to toughen up on the rules.
Liberal democrat peer Lord Sharkey said firms should only get a full discount on the fine by taking disciplinary action against the staff responsible for the misconduct.
The proposed amendment to the Criminal Finances Bill, he said, would put the “gigantic” discount mechanism to better use.
“This is a simple proposal. It would give the FCA more power and more insight into how transgressors had modified their behaviour and addressed individual and structural capability.
“It would give the firms involved a powerful incentive to take proper remedial action – which, unfortunately still seems to be needed.”
Companies were granted a full discount on 66 occasions during the four years, out of 82 penalties in total, while just eight firms paid out their full fine, figures showed.
Deutsche Bank received the largest total discount on its penalty at £165m, followed by RBS at £157m, and JP Morgan at £155m.
The biggest five discounts were all linked to manipulation of the foreign exchange markets.
In 2013, the Parliamentary Commission on Banking Standards called on the regulators to review their framework in order to increase fines.
However, Lord Sharkey stressed that this review had not yet been undertaken.