The Financial Services Authority set itself new rules yesterday to clarify and tighten up its procedures for investigating and disciplining companies accused of wrong-doing.

A five-month review was begun after the the independent Financial Services and Markets Tribunal ordered the regulator to reduce a £1.1 million's fine on Legal & General and found its handling of the case " in error in its approach...reached conclusions not justified by the facts before it".

The report of the internal review headed by David Strachan, head of the FSA's retail wing, reinforces the independence of its regulatory decisions committee.

This will now have two full-time lawyers to vet its disciplinary decisions and no longer rely on the advice of lawyers in the investigatory enforcement division.

All contacts between investigators and the regulatory decisions committee will be minuted and disclosed to the companies being investigated.

There will also be specific discounts of up to 30 per cent in the fines imposed on companies who settle early in the process, to encourage them to save time and money and pay redress promptly to their customers.

The changes are expected to cost about £2.5 million a year, to be paid out of the FSA's budget.

Callum McCarthy, the FSA's chairman, said the recommendations "will bring greater clarity as to why certain cases are subject to enforcement action and that those affected will have a better understanding of the case to which they must respond".

"The recommendations will establish much more clearly the separation between those who prepare an enforcement case and those who make decisions in the case," he added. "The FSA is not - and will not become - and enforcement-led regulator. We regard enforcement as a regulatory tool to be used selectively.

"But when it is used, it must be seen to be fair and combine fairness with reasonable speed and reasonable cost."

Firms that are disciplined will be invited afterwards to comment on the FSA's procedures - though not necessarily on its conclusions.

One of L&G's key complaints cited undisclosed legal advice that the FSA's enforcement division provided to the regulatory decisions committee.

Yesterday L&G's chief executive Sir David Prosser welcomed the findings of the review.

"The review of enforcement procedures at the FSA has been very thorough and will lead go a fairer and better process," he said