In a leaked memo, the head of Singer & Friedlander accuses Kaupthing bosses of not being up to the job.
The UK's financial regulator received a specific warning of the potential dangers of allowing a takeover involving a now-collapsed Icelandic bank to go through.
Kaupthing's takeover of Singer & Friedlander in 2005 was advised against by the UK merchant bank's then-chief executive, Tony Shearer. The bank boss made his feelings known to the Financial Services Authority (FSA) at the time, Channel 4 News reports.
In a leaked memo to MPs seen by the broadcaster, Mr Shearer said that the Icelandic bosses were "not fit and proper" to run the UK bank - a sentiment that was "shared by most, if not all, of the other members of the Singer & Friedlander board".
He added: "I believe that the FSA had sufficient information that they should never have approved the change of control … If they were to do so, they should have made extensive further inquiries."
Last October, the Icelandic economy went into meltdown as it suffered a catastrophic decline in investor confidence that the nation's big corporations were able to pay back their debts. Iceland's three largest banks, Kaupthing, Landsbanki and Glitnir, were then nationalised.
A diplomatic spat began between the Scandinavian nation and the UK over British savers who had deposits with Kaupthing and Landsbanki through their overseas unites Kaupthing Edge (run by the newly-merged Kaupthing, Singer & Friedlander) and Icesave. All UK savers have since been reunited with their funds.
