The City regulator has fined Bank of Scotland £45.5m for failing to disclose information about a £245m fraud scandal at the bank’s Reading branch which resulted in six people going to jail.

The Financial Conduct Authority (FCA) said the bank had “risked substantial prejudice to the interests of justice” by withholding information. At the time of the fraud, Bank of Scotland was part of the HBOS group, which was acquired by Lloyds in 2009.

The fine is in relation to a scam involving rogue employees at HBOS’s Reading branch and a group of consultants that ran between 2003 and 2007. It drained the bank and small businesses of about £245m and left hundreds of people in severe financial difficulty. The fine was reduced by almost £20m because the bank agreed to settle.

HBOS first identified suspicious behaviour in its impaired assets team – which handled struggling business – in early 2007, but failed to notify regulators fully until July 2009.

Under the fraudulent scheme, small firms were pushed under or damaged by being referred to a turnaround consultancy and loaded with unmanageable debts and fees. The fraudsters spent the proceeds on sex workers, superyachts and luxury holidays.

The FCA said there had been “insufficient challenge, scrutiny or inquiry across the organisation and from top to bottom”, but said it had found no evidence that anyone had considered the consequences of not telling authorities about the suspicions.

Lloyds took over HBOS in September 2008 at the height of the financial crisis. While the acquisition made the newly formed Lloyds Banking Group the dominant player on the British high street, it also proved deeply problematic and the government was forced to bail out the bank.

The fallout from the Reading fraud has lasted for more than a decade, with victims highly critical of the bank’s handling of the scandal and “derisory settlements”. Those affected have been offered packages ranging from less than £100,000 to more than £5m.

On Friday, the FCA also banned four individuals from working in financial services, two years after they were convicted of fraud and sent to prison. They are Lynden Scourfield, Mark Dobson, Alison Mills and David Mills. Scourfield and Dobson were both former HBOS employees.

Nikki Turner, one of the fraud victims and a member of the SME Alliance business group, called for the FCA to investigate a “cover-up” by senior executives at HBOS.

“Action coming over a decade after the event is the ultimate insult. The only bankers banned are those who’d never work in the industry again, while their bosses get off scot-free and the bank is fined what is little more than small change,” she said. “It is also insulting that Lloyds receives a discount for being a ‘good boy’.”

Lloyds also held out for years against the publication of a highly critical whistleblower report, which was eventually leaked. The FCA has been criticised for its handling of the report.

Mark Steward, the director of enforcement and market oversight at the FCA, said: “Bank of Scotland failed to alert the regulator and the police about suspicions of fraud at its Reading branch when those suspicions first became apparent.​​​​​ BOS’s failures caused delays to the investigations by both the FCA and Thames Valley police.

“There is no evidence anyone properly addressed their mind to this matter or its consequences. The result risked substantial prejudice to the interests of justice, delaying scrutiny of the fraud by regulators, the start of criminal proceedings as well as the payment of compensation to customers.”

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

António Horta-Osório, Lloyds Banking Group’s chief executive, apologised for the “dark period in HBOS’s history”.

He added: “I want to apologise once again for the very deep distress caused to the customers affected by the HBOS Reading fraud. The perpetrators of the fraud rightly went to jail for the crimes they committed. The group’s management team has been committed to putting things right.”

Horta-Osório said Lloyds has offered compensation to the victims of the fraud, with 98% of the offers accepted so far. Lloyds has appointed a former high court judge, Sir Ross Cranston, to run an independent review of the compensation scheme.