The Financial Services Authority (FSA) has been sitting in on the board meetings of some of the largest City firms.
The regulator has attended the meetings of large banks and other "high risk" firms for the past three months, the Guardian reports.
Chief executive Hector Sants describes the approach, which involves the FSA sitting in on board, sub-committee and divisional meetings, as "eyeball-to-eyeball" regulation.
Investors are concerned FSA staff could be regarded as shadow directors, exerting influence with no accountability to shareholders, the paper said.
In turn, this could drive decision-making away from the boardroom and reduce overall accountability, sources said.
An FSA spokesman said: "Our more intensive supervision of the largest and most complex firms includes a greater emphasis on the senior management and governance of the firm."
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