The newspaper says the internal report criticises FSA staff and chief executives of FSA-regulated firms for racist behaviour including offensive language and jokes.
According to The Observer, the report was compiled after more than 1,800 employees completed a “diversity climate questionnaire” online.
The report, published internally in September 2008, claims that lower-level employees are too frightened to speak out, saying it is “career suicide” to make a complaint against senior staff.
A whistleblower who leaked the report to The Observer told the newspaper: “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.”
An FSA spokeswoman says: “We pride ourselves on being an inclusive organisation and we do not tolerate discrimination. We commissioned this study because we wanted to see how we were doing and a lot of positives also came out of it.”
She says she is unsure whether the report will now be made public.
She adds: “I don’t see why it should be. Yes, the report did identify a small number of individual problems but it found that they were not endemic in the FSA.”