The review by Raj Parker warned the Financial Conduct Authority's regulation of entities and individuals connected to the fund was "not appropriate or effective" and could have done more to protect its investors.
In a theme echoed in a similar investigation into the regulator's handling of the London Capital & Finance fallout, the report also found there was insufficient information-sharing between divisions, departments, and teams at the FCA at the time of the collapse.
Mr Parker also echoed the criticism of the FCA made by the Complaints Commissioner, who said the FCA "shifted the focus" away from its regulatory failings onto IFAs.
In his report, Mr Parker said the FCA "chose to focus" on financial promotions and point of sales areas and as a result "concentrated on the selling practices of IFAs".
He said: "Investors were at risk not just due to the advice they received, the misleading disclosures in the scheme documentation, and the poor selling practices of some IFAs (as repeatedly found by the [Financial Ombudsman Service]).
"The design and operation of the scheme itself, in which there were clear deficiencies and a lack of oversight and governance, contributed to the risks."
The Connaught fund was an unregulated collective investment scheme run by operators Capita Financial Managers and Blue Gate Capital from March 2008, providing short term bridging finance to commercial operators in the UK property market.
The fund went into liquidation in December 2012, with investors losing £118m in the process.
Mr Parker said: "I acknowledge the difficulties with effectively regulating UCISs against the prevailing issues with the perimeter and the internal environment in which the regulator operated at the relevant time, which is different to today.
"However, even judged by the standards and approach of the day, the regulator can reasonably have been expected to have done better in focusing on consumer protection."
In particular the investigation warned concerns surrounding Connaught raised by whistleblowers at the time were "not given the weight and examined in the context that they merited" at the time.
'Could have been more effective'
Mr Parker did however credit the FCA for its part in recouping investor funds following the collapse, claiming it was "instrumental" in the return of around £84.5m.
But he added: "However, this does not answer the question of whether the regulator's handling of the Fund was appropriate and could have been more effective before its collapse in 2012 and in the immediate aftermath."
The report suggested five recommendations, which included the likes of whistleblower systems and the culture at the regulator, all of which the FCA accepted.
FCA chairman Charles Randell said the FCA was "profoundly sorry" for the mistakes is had made and admitted there were a number of things which it could have done better in its supervision of the Connaught case.
He added: "This report not only highlights operational mistakes; it also indicates that the measures we introduced may not have been as effective as we wanted and challenge the balance that we struck at that time.
"Over the last few years we have already made significant changes in our approach to supervising firms."
rachel.mortimer@ft.com
What do you think about the issues raised by this story? Email us on fa.letters@ft.com to let us know.
