Managers at the Financial Services Authority (FSA) preside over a culture of racism, a whistle-blower has revealed.
A leaked internal report, compiled in September 2008 following a staff diversity survey and focus groups, found racism at the City watchdog was "particularly problematic", with many incidents left unchallenged.
The report, obtained by the Observer, showed that staff were afraid to speak out about the racist behaviour of "untouchable" senior managers because they believed it would be "career suicide". One member of staff said: "If you raise a grievance you might as well get your P45."
The whistle-blower said: "Racism has been going on for years at the FSA and I think the problem is endemic. The FSA sanitised the report; people said things that were not put in. People have left because of frustration with discrimination. They leave before they are sacked.
"There's no will to do anything about this in the FSA. We had a fight to get this report. The FSA would rather recruit whites from South Africa and Australia than blacks from the UK."
The conduct of chief executives at FSA-regulated firms during meetings was also criticised in the report, with one said to have used the term "nigger", while another joked about a Muslim suicide bomber - both incidents went unchallenged.
The report said: "The focus groups identified some diversity-inappropriate behaviour within the FSA, particularly in relation to black and ethnic minority employees.
"This behaviour is demonstrated by both FSA employees and clients towards FSA employees. Although this type of behaviour is not endemic, it is particularly problematic because it goes unchallenged within the organisation."
The report added there was "little challenge of inappropriate behaviour within the FSA and some employees were described as 'untouchable'".
The City watchdog said: "The FSA prides itself on being an inclusive employer and we do not tolerate discrimination.
"We have enhanced our diversity training, provided information to staff at every level in the organisation, and managers have been provided with specific guidance. The work also led us to change our procedures to ensure if staff have any concerns they can be confidentially reported."
It was recently revealed that staff at the FSA would receive a 40% increase in their bonuses this year , despite the fact that the watchdog admitted having failed in its duty to properly regulate the banking system.