The Financial Conduct Authority has changed its approach to supervision after it received intelligence about a firm defrauding investors but took no action for six months.
Complaints Commissioner Antony Townsend upheld a complaint against the FCA and said it was a matter of "considerable concern" that the regulator had intelligence about the unnamed firm from several sources for more than six months without taking action.
In a damning ruling, Mr Townsend said he believed the case represented wider problems in the FCA's supervision of firms being carried out with a "lack of curiosity or sense of urgency", claims the regulator denied.
Mr Townsend asked the FCA to provide him with confidential updates about its supervision of the firm, which has since gone into administration, and the allegations of fraud.
He also told the FCA to consider revising its supervisory approach to small firms.
He said: "The FCA states that because the firm is now in administration it does not consider it is necessary to provide further updates about supervision of the firm.
"Although I accept that there will no longer be supervision, I remain concerned that the allegations of fraud and misrepresentation [...] have not been investigated and that there appears to be a lack of curiosity or sense of urgency about these matters from the regulator."
Mr Townsend revealed the FCA intends to take "steps to improve its supervisory approach".
"I urge the FCA to publish information about the improvements it is making, and I will consider the effectiveness of these improvements in the context of the complaints which I receive," he said.
The FCA received intelligence about the firm in January 2017 but it was not assessed until around 2 June 2017 when a caseworker in training was assigned.
In June the FCA decided to use its powers under section 165 of the Financial Services & Markets Act to obtain information from the firm, but it was not until November 2017 that the regulator actually took steps to act on these powers.
According to the FCA's file, during this period so-called "project work" was prioritised and some staff were off sick.
This led to a complaint against the FCA that it had failed to supervise the firm effectively and had failed to identify financial problems the firm was experiencing, and had not addressed misleading advertising produced by the firm when it launched an investment platform.
The FCA had said this was an "isolated incident" but Mr Townsend said the evidence he had seen suggested this was not the case and there were "wider problems" in the team.
The FCA has been asked to comment.