The government should clarify responsibilities and strengthen oversight over the new, powerful regulators in its sweeping overhaul of the country's regulatory system, a key parliamentary committee said on Monday.
However, the joint committee looking into the draft Financial Services Bill, which will make the Bank of England the key player in the regulation of the country's financial sector, backed regulators' call for more discretionary powers to avoid the shortfalls of a fully rule-based regulation approach.
The committee also supported in its report published on Monday the recommendations made by the Independent Commission on Banking, which include a requirement for banks to ring-fence retail operations from investment banking.
Chancellor George Osborne will present the official response to the ICB report later on Monday, though the government has already said it fully supported the recommendations.
Britain has set out for a complete overhaul of its regulatory system after taxpayers had to bail out several banks with tens of billions of pounds.
The parliamentary committee said a new culture of regulation was paramount to prevent future crises.
A failure to look ahead for emerging risks was identified as a major failing before the banking crisis and the Committee argues that 'judgement-led' supervision, rather than focusing on a strict application of fixed rules, is vital for future regulation, it said, urging the government to enshrine this in legislation.
Regulators have called for such discretionary powers, saying the old check-list approach had failed to identify the risks that ultimately led to the collapse of banks such as Northern Rock or RBS.
The Bank will be home to the new Financial Policy Committee - in charge of macro-prudential regulation to prevent failures of the banking system as a whole - as well as bank regulator Prudential Regulatory Authority.
The Bill gives substantial new powers to the Bank of England. These should be matched by changes to ensure the Bank is suitably accountable to Parliament and the public, the committee said.
The Bank of England's governance structure should be changed with a new powerful Supervisory Board replacing the Court of Directors, it said.
BoE officials have questioned the need for a new oversight body, saying the Bank was already ultimately responsible to parliament.
The committee also said external experts should have a majority on the FPC, and parliament and government should exercise more oversight of the FPC's remit and its macro-prudential tools which can affect households and businesses.
The committee also called for the new legislation to spell out the powers and responsibilities of the BoE and the finance minister, or chancellor, in case of a crisis.
The Chancellor should be given an automatic power to direct the Bank of England when a material risk to public funds becomes clear, the committee said. The Chancellor must from that point on take responsibility for handling the crisis.
(Reporting by Sven Egenter; Editing by Dale Hudson)