Britain's financial watchdog has lost a key test of its powers to punish bankers for alleged supervision failures when a fine on a senior UBS banker was overturned by a court.

In a rare successful appeal against a fine imposed by the regulator, John Pottage was cleared of misconduct by Britain's Upper Tribunal over compliance failings that occurred under his supervision at UBS's British wealth management business, which he ran.

The Financial Services Authority had sought to fine him 100,000 pounds ($161,000) for alleged failings as the unit's boss, even though he was not personally involved in the compliance issues.

We think that the actions that Mr Pottage in fact took prior to July 2007 to deal with the operational and compliance issues as they arose were reasonable steps, the Upper Tribunal said in its ruling, seen by Reuters.

The FSA said it accepted the decision, and that it would not be deterred from pursuing disciplinary action against senior management.

We have always recognised that pursuing disciplinary action against senior management in large firms is very challenging. But we also believe strongly that senior management must take responsibility for the businesses they run, said Tracey McDermott, acting director of enforcement and financial crime at the FSA.

The case has been closely watched by rival banks, as a potential precedent-setter in terms of how far up the ranks responsibility for failings can go.

Every situation is judged on a case-by-case basis, however, and the ruling may not preclude other bankers in senior roles being held responsible for the goings-on in their businesses.

UBS itself is still embroiled in a separate investigation after a rogue trader caused a $2.3 billion loss last year. The results of that probe are still not known, however.

Although wins against the FSA are still rare, other senior bankers are also following this route. Prominent JPMorgan dealmaker Ian Hannam was fined 450,000 pounds for market abuse in early April, a punishment he is appealing.

Pottage has had the backing of UBS throughout the case and is still an employee of the firm in Switzerland.

The bank itself was fined in relation to the control weaknesses at the wealth management division, and has said the failings were remediated by June 2009. The firm was an interested party in the Pottage case, not a defendant.

We are pleased with the outcome and that this matter is now closed, UBS said in a statement.

(Reporting by Sarah White; Editing by Steve Slater and Hans-Juergen Peters)