Speaking to the Guardian after delivering his last speech as chief executive of the City regulator, Sants also said he was "concerned" about the way directors of major financial institutions are selected.
The 56-year-old, who will leave the FSA in June after eight years, insisted his decision to step down rather than become deputy governor of the Bank of England and head of the new Prudential Regulation Authority was solely because he wanted to do a different job.
After addressing an invited audience in the City, Sants told the Guardian: "If I had been a senior bank executive in the last three or four years I would have taken a different view about individual pay levels than many, but not all, of the banks did. I think that would have been a very good signal which would be part of the restoration of trust."
Sants did not take his own £130,000 bonus for the 2008/9 financial year and since then has handed his £100,000-a-year bonus to charity.
He said City bosses should be motivated not only by the potential rewards: "Should there not be some level of expectation that people entrusted with the leadership of financial services organisations ultimately are driven by the desire to 'do the right thing'. It's called integrity and it is what we all, as users of financial services, expect of the leaders of the sector."
Sants said that in the run-up to the financial crisis: "integrity seems to have been in short supply, in the sense that when making their major decisions there seems to have been an absence of focus on whether this decision is going to deliver a good outcome for wider society as a whole and the long-term interest in general".
Reflecting on the failures banks such as Royal Bank of Scotland and HBOS, he said that "there were a number of people in key positions in a number of those major financial institutions who didn't have the required technical competency" – an opinion he has previously shared with the Treasury select committee.
The FSA has since started to interview people regarded as holding "significant influence functions" – executives and non-executives who chair key committees such as risk and audit – and of 653 applications in the past two years some 48 had been withdrawn, 39 because of concerns identified by the FSA. "There is a view held by some, unfortunately, that they are entitled to a position regardless of their skills and their experience," Sants told his audience.
Bank chairmen, he has concluded, should always have financial services experience.
On pay, Sants called for more non-financial factors to be considered – such as the way customers are served, in light of the payment protection scandal – in addition to the usual measures of shareholder returns.
Sants said: "I think that's what shareholders should want … We need to break this deadlock that we have between lack of trust in institutions, lack of long-term behaviour by executives and lack of engagement by the shareholders."
The FSA has been criticised for its handling of banking crisis – as has Sants himself – but he insists that the FSA was constrained by its remit during the financial crisis and could not intervene in takeovers such as the lethal RBS bid for ABN Amro. "At the end of the day, all those firms failed because of decisions by their management. It's really important we don't let the management off the hook. There is a danger that people forget that it is up to the regulator to set boundaries in which the management make decisions."
He also refuted any suggestion that the FSA could have taken action against former RBS boss Fred Goodwin but chose not to. The FSA has found the Bank of Scotland division of HBOS guilty of "serious misconduct" but is yet to offer opinions on its management team.
Sants said that when he first joined the FSA he believed he was working in "partnership" with regulated firms, but he now believes the relationship between financial firms and the watchdog should be one of "constructive tension".
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