Chancellor Philip Hammond should commission an independent review of financial services regulation with a view to setting up a separate enforcement body, a parliamentary report has recommended.
The current system - under which the Financial Conduct Authority supervises, applies and prosecutes the law - is "outdated and can be construed as unfair", warned the House of Commons Treasury Committee.
It called on Mr Hammond to reconsider predecessor George Osborne's rejection of a recommendation by the Parliamentary Commission on Banking Standards, which said in 2013 that the system could be improved by dividing enforcement and supervision functions into two separate bodies.
The Treasury Committee's call came in a report reviewing the response of regulatory authorities to the 2008 collapse of the bank HBOS, which found that the now-abolished Financial Services Authority failed both before and after the crisis.
Despite the FSA's subsequent replacement by the Financial Conduct Authority and the Prudential Regulation Authority, the committee found that the process of creating a better alternative is "still work in progress, particularly at the FCA".
The FSA's successor bodies must show "greater vigilance and energy" to convince the public that they have learnt the lessons from its failings, said the cross-party committee, warning that "this has on occasion been lacking".
The Treasury Committee said it expects the FCA and PRA to show "a very high degree of independence and transparency" in using new powers given to them after the banking crisis.
And it warned the FCA risks "regulatory overload" because of its wide range of objectives and initiatives.
HBOS's 2008 failure was the second largest in British banking history. A scathing report published by the FCA and PRA in November 2015 blamed an over-ambitious business strategy and poor risk management by the bank's board, as well as shortcomings in FSA supervision.
An independent study by barrister Andrew Green QC found that the relationship between enforcement and supervision within the FSA had been highly problematic and did not deliver the expected degree of co-operation. And the PCBS called for enforcement and supervision to be divided between two separate authorities.
Now the Treasury Committee has found that the creation of a separate enforcement body could increase confidence in the impartiality of decision-making, facilitate objective scrutiny of supervisors' actions and provide greater clarity about regulators' objectives, resulting in better accountability and better outcomes.
Committee chair Andrew Tyrie said: "The case for placing the FCA's enforcement function in a separate body - proposed by the PCBS in 2013 and later rejected by the Treasury - has been strengthened by the findings of Andrew Green's report.
"A separate body would bolster the perception of the enforcement function's independence, and provide the regulators with greater clarity over their objectives. The case for separation merits serious re-examination. The Treasury should appoint an independent person to undertake a review."
The Treasury Committee also branded as a "serious mistake" the decision of the Financial Reporting Council not to investigate the auditing of HBOS prior to the completion of the FCA/PRA report. The decision was "better late than never" but suggested "a lack of curiosity and diligence", said the committee, which said it would be "keeping a close eye on the FRC's work".
The FRC said it had made clear in 2013 that it needed to see the FCA/PRA report in order to determine whether there was a case for it to carry out an investigation.
"When we finally saw that report in we identified an area of concern, rapidly undertook enquiries which have now led to a formal disciplinary investigation into KPMG's audit of HBOS," said a spokesman.
He added: "The FRC's enforcement procedures are carried out in the public interest robustly and thoroughly in order to reach the right decisions based on the evidence available. Our enquiries into the audit of HBOS's loan loss provisions were thorough and concluded there were no reasonable grounds to suspect misconduct.
"Our current investigation is considering issues in the audit around the use of going concern assumptions at HBOS. We will report our conclusions as soon as our investigation is complete. We have stated publicly that at the end of our enforcement proceedings we will publish a report on how we reached our conclusions on each issue."
A Treasury spokesman said: "The shortcomings that led to the failure of HBOS in 2008 prove that the government was absolutely right to overhaul our system of financial regulation.
"Since 2010 we have dismantled the failed tripartite system and put in place a more focused system of judgment-led supervision by the Financial Conduct Authority and Prudential Regulation Authority. We've also hardwired responsibility and accountability into the financial system, with an emphasis on key decision makers at the top of banks.
"Our reforms directly address the regulatory failings identified in this report."