Reorganising the regulators in this was would “bolster the perception of the enforcement function’s independence”, as well as making the existing regulators’ objectives clearer and preventing “regulatory overload”, particularly in the case of the overburdened FCA, according to Andrew Tyrie, chair of the Treasury Committee. The enforcement function “could and should sit equidistant” between the two supervisory regulators, the Committee’s report  said.

The recommendation comes as portion of a fresh report into the regulatory failures immediately infrontof and following the bailing out by the UK government of HBOS, the bank, in 2008. The Parliamentary Commission on Banking Standards (PCBS) previously recommended locating the FCA’s enforcement function in a separate body in its own report commissioned following the financial crisis, but the recommendation was rejected by the UK Treasury.

In its report, the Treasury Committee said that it was clear from a separate report on the enforcement decisions the regulator took commissioned by the regulators in response to the failure of HBOS, that the relationship between the enforcement and supervision functions within the Financial Services Authority (FSA) was “highly problematic”.

“Keeping both functions within the same organisation did not result in a lofty degree of co-operation, undermining the argument that the two functions should remain beneath the same roof,” the committee said in its report. “In the light of this, the committee believes the merits of structural separation endure re-examination.”

“A separate statutory body would bolster the perception of the enforcement function’s independence. The current system, whereby the same organisation both supervises, applies and prosecutes the law is outdated and can be construed as unfair. By moving enforcement away from supervision, it can focus independently on undertaking its answer functions: interrogating evidence and assessing whether a regulatory breach has been committed,” the committee said.

The committee expects the Treasury to appoint an independent reviewer to re-examine the case for a separate enforcement body as portion of its response to the report, it said.

The committee’s report draws together the findings of two reviews into the failure of HBOS: the joint review by the FCA and PRA, and an independent review of the FSA’s enforcement decisions in relation to that failure by Andrew Green QC. It also considers a separate Treasury Committee review of these two reports, as well as additional oral evidence. HBOS was bought over by rival Lloyds Banking Group in 2008 and later required a £20.5 billion bail-out by the UK government.

The collapse of HBOS and other financial institutions was the result of “prudential failings” which, since the crisis, possess led to changes intended to improve the regulatory regime and which include, according to the committee,  the break-up of the FSA into the FCA and PRA to separate the prudential and conduct regulators which possess additional powers including powers over the leverage ratio for the Bank of England and the power to ‘electrify’ the ring-fence so the regulator can potentially restructure banking groups. A fresh Senior Managers and Certification Regime governs individuals’ conduct.

“The committee expects the regulators to demonstrate a very lofty degree of independence, and transparency, in [the operate of these powers],” Tyrie said.

A particular concern highlighted by the committee was the FSA’s insistence that it faced political pressure to promote ‘light touch’ regulation around the period of the financial crisis, preventing its early intervention when it became apparent that lenders were getting into difficulties, according to its report.

“The FSA’s past recourse to political encouragement to promote ‘light touch’ regulation does not inspire confidence in the fresh regulators’ capacity to demonstrate the independence required by their statutory mandates,” it said in its report.

“In future, if the regulators do feel beneath such pressure, it is their duty to inform parliament. The Treasury Committee will expect them to do so,” it said.