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A Joint Committee of MPs has called for significant amendments to the Financial Services Bill to clarify the objectives of the three new regulatory bodies, including the replacement Financial Services Authority.

As well as wanting the Bank of England to be “modernised” and made more accountable to Parliament, the Committee also suggests that once the Bank of England identifies a threat to public funds it is the Chancellor who must assume overall power and responsibility for handling the crisis.

One problem identified with the current regulatory regime is a lack of clarity about who was in overall charge hence the desire to clearly distinguish the specific responsibilities of the three new organisations - the Financial Policy Committee, the Prudential Regulation Authority, and the Financial Conduct Authority.

The report refers to giving the three “a clear focus and end the ‘fuzzy allocation of responsibilities’ identified by the Committee as a failure of the previous tripartite regulatory system”.

It also points out: “While the Bill focuses on regulatory structure, it is the culture, focus and philosophy of a regulator that has the greater impact on how it performs, and more needs to be done to foster a new regulatory culture.

“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.”

The Committee wants this concept prioritised in future legislation.

Committee’s key recommendations:

• The Chancellor should be given an automatic power to direct the Bank of England when a material risk to public funds becomes clear.
• The substantial new powers the Bank of England will have should be matched by changes to ensure it is suitably accountable to Parliament and the public, with a new supervisory board replacing the court of directors.
• The establishment of a high level Committee reporting to the Chancellor comprised of representatives of the PRA, FCA, Bank of England and Treasury to agree British objectives and maximise the UK’s influence in EU and international rule making.
• The UK must be free to set higher capital requirements for banks than that required by the EU given the importance of banking to the UK economy.
• The objectives of the new conduct regulator, the FCA, should be rewritten to focus on promoting fair, efficient and transparent financial services markets that work well for users.
• Banks have been involved in practices that were unethical and designed to maximise remuneration regardless of risk to the bank or the economy. The Government and the regulators should consider increasing the share of executive remuneration that is deferred and conditional on medium-term outcomes, or introducing a concept of ‘strict liability’ of executives and Board members for the adverse consequences of poor decisions, in order to ensure that  bank executives and Boards strike a different balance between risk and return.