Banking regulation proposals 'largely cosmetic', warn MPs

Treasury Select Committee says that government proposals fail to address the financial crisis

The government's banking regulation proposals are "largely cosmetic" and "lack clarity", MPs have warned.

In a new report on the banking crisis, the Treasury Select Committee said that the chance to impose significant reforms on the banks was being lost as responsibility for financial regulation remained a "muddle".

It said that the decision by Alistair Darling to endorse the current tripartite system, which divides responsibility for regulation between the Bank of England, the Treasury and the Financial Services Authority (FSA) had been hurried and made too early.

John McFall, chairman of the committee said: "The tripartite structure of regulation is in a state of flux at the moment: change and coordination are clearly needed to clarify responsibilities, but the picture is constantly moving. Institutional reforms should wait until the macroprudential tools themselves have been designed. When the dust settles though, we cannot afford to have any ambiguity over who is in charge, and who is responsible if something goes wrong."

The Conservatives have argued that the FSA should be disbanded, with many of its powers transferred to the Bank of England. But the committee noticeably rejected the Tory proposals, arguing that a decision should be delayed until there was a consensus on the structure of the banks themselves.

Vince Cable, the Liberal Democrat Treasury spokesman, said the report highlighted the flaws of the Conservative proposal. "The committee is right to say that more fundamental issues need to be agreed before rushing to scrap the FSA," he said.

The report, Banking Crisis: Regulation and Supervision, also says that the FSA "failed spectacularly" in overseeing the banks. It argues that the authority must be far more prepared to tackle excessive risk-taking in the City.

But McFall conceded that the FSA had "already begun to rectify its mistakes" and was now "moving in the right direction".