The committee also recommended splitting the roles of chairman and chief executive, currently filled by Howard Davies, and has proposed a tougher complaints procedure including the appointment of a complaints investigator to protect both the public and firms from abuse of the sweeping powers that the new financial sector regulator will have.
It recommends the investigator be allowed to award compensation in cases of FSA "maladministration", that defendants in FSA disciplinary hearings be entitled to legal aid, and that the practice of routinely awarding costs against defendants in disciplinary hearings be stopped.
The committee, composed of MPs, broadly accepted the thrust of the Government's proposals for bringing regulation of the industry under one roof although one committee member, the Conservative MP David Heathcote-Amory, said the bill was "deeply flawed".
Nevertheless, they all accepted consumers groups' argument that a mortgage is "one of the most significant financial transactions that most people make" and that leaving out responsibility for policing it was a glaring anomaly.
They were also critical of the Government's failure to address the human rights' implications and gave the Government one month to table a response on how the bill can be made compatible with the European Convention on Human Rights.
Lord Burns, the former permanent secretary to the Treasury who chaired the committee, said: "The FSA will become one of the most powerful financial regulators in the world in terms of scope, powers and discretion. The challenge is to deal with wrongdoing but in a way which does not interfere with individual rights."
The Treasury yesterday gave a cautious welcome to the recommendations, saying they required further study. It will find it difficult to reject the recommendations from the committee, which it set up to answer charges that the bill, pledged to be on the statute book next year, has been rushed with insufficient consultation.
Mr Davies welcomed the report. Although there are concerns about the practicality of some the recommendations, there was nothing that "would cause anyone here's brow to furrow," a senior FSA official said.