The City watchdog, the Financial Services Authority (FSA), paid out £19.7 million in bonuses for the last 12 months, compared with just £13.9 million the previous year.
This 40 percent increase comes as the financial sector goes into meltdown.
The FSA claims it must pay more to attract and retain the highly qualified people it needs to improve regulation in the wake of the financial crisis.
Yet the FSA identified that Northern Rock was at risk five years ago and failed to act.
FSA chief Hector Sants said in 2007 that no “reasonable professional would have anticipated that set of circumstances”.
The Treasury select committee attacked the FSA for its “impotence” over the Icelandic bank collapse and “complacency” regarding executive pay.
It also said it was guilty of a “systematic failure of duty” over its regulation of Northern Rock, which had to be nationalised in early 2008, saying the FSA should have spotted problems sooner.