MPs are calling for a breakup in the structure of the Financial Conduct Authority (FCA) and proposing a case for a new enforcement body, the Treasury Select Committee has said in a report.
The committee's comments follow findings of a review by the FCA and the Prudential Regulation Authority (PRA) into the failure of HBOS, and a report by Andrew Green QC last year on the decisions taken by the then regulator the Financial Services Authority (FSA).
MPs said that the functions of the FCA should be separated as a new body would "bolster the perception of the enforcement function's independence". The current system of the FCA is "outdated and can be construed as unfair" according to the committee.
"By moving enforcement away from supervision, it can focus independently on undertaking its key functions: interrogating evidence and assessing whether a regulatory breach has been committed," MPs said.
The committee believed the separation would allow all three regulators - the FCA, PRA and the enforcement body - to "enjoy much greater clarity over their objectives".
"An FCA with fewer objectives, and a single separate body responsible for enforcement, would probably result in better accountability and better outcomes," it said.
However, the FCA stated it had a range of tools at its disposal of which enforcement was an essential one.
A spokeswoman for the regulator added: "We believe that if this regulatory tool is separated from the FCA it would potentially lessen our ability to be an effective regulator and impact our ability to protect consumers and ensure the integrity of the UK financial system."
The Treasury Select Committee argued that the collapse of HBOS, along with other UK financial institutions during the crisis, was the result of prudential failings.
It said it was "far from satisfactory" that the bulk of enforcement staff and expertise still lies within the FCA, which "has no role in prudential supervision of banks". MPs claimed an independent enforcement function could and should "sit equidistant between the PRA and FCA".
Troubled bank HBOS collapsed in 2008 and needed a £20.5bn government bailout.
The committee criticised the former regulator, the FSA, for not being able to protect consumers from "spectacular regulatory failures".
The FCA said it had learned from its predecessor by changing a number of its processes.
However, it argued that the ultimate responsibility for the failure of HBOS rested with the board and senior management.
"They failed to set an appropriate strategy for the firm's business and failed to challenge a flawed business model which placed inappropriate reliance on continuous growth without due regard to risks involved," said the FCA's spokeswoman.
"In addition, flaws in the FSA's supervisory approach meant it did not appreciate the full extent of the risks HBOS was running and was not in a position to intervene before it was too late."