A group of MPs have recommended the Financial Conduct Authority (FCA) be broken into two so one part focuses on finding rule-breaking banks and the other supervises the wider financial industry.
In a report entitled Review of the reports into the failure of HBOS, the House of Commons Treasury Committee has said the FCA is "outdated and can be construed as unfair".
It suggests separating supervision and prosecution into two functions, stating the case "merits serious re-examination" and urged the Treasury to appoint an independent person to undertake a review, according to the BBC.
It criticises the old Financial Services Authority as well as the FCA, which replaced it in 2013, for their role in the HBOS bank saga which saw former HBOS chief Andy Hornby not being properly investigated.
In 2008, the bank became part of the Lloyds Banking Group and needed £20.5bn from UK taxpayers to prevent it from crashing.
Andrew Tyrie, chairman of the committee, said: "The regulators failed, both before and after the HBOS crisis. Seven years after the bank's collapse, we now know just how badly - and not because the regulators showed a spirit to learn the lessons of the past."
"The plain fact is that the FSA did not succeed in protecting consumers from spectacular regulatory failures."
The report said the FSA was "not up to the job" and "clearly a highly dysfunctional institution" and that its "legacy continues to pose a major challenge for its successor bodies, particularly the FCA".
The idea of a new enforcement body, separate from the City watchdog, was first suggested by the Parliamentary Commission on Banking Standards.
However, the Treasury rejected this suggestion in 2014, saying there were "clear advantages to locating the supervisory and enforcement functions within the same organisation". It also claimed practical and legal issues could affect the efficiency of regulation.
The Treasury Committee report also critisised the Financial Reporting Council's decision not to investigate the auditing of HBOS earlier than it did which showed a "lack of curiosity and diligence" and that even parliament was not alert enough before the crash.
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The Treasury said it will look at the new report in detail in due course.
It added: "Since 2010, we have dismantled the failed tripartite system and put in place a more focused system of judgement-led supervision by the Financial Conduct Authority and Prudential Regulation Authority.
"We have 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."
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