MPs attack government shake-up of City regime as 'a muddle'

Treasury Committee says reforms are 'cosmetic' and urges Chancellor to change

An influential committee of MPs will today launch a stinging attack on planned reforms to Britain's system of financial regulation.

The Treasury Select Committee will describe the Government's proposed changes to the "tripartite" system that brings together the Treasury, Bank of England and Financial Services Authority to oversee financial stability as "cosmetic". It will also say that the system remains "a muddle" in the wake of the banking crisis that has rocked the economy.

The report will express grave concerns about Mervyn King, Governor of the Bank of England, telling the committee he was given no information about the White Paper outlining the reforms before it was published.

The report says: "The Committee was extremely perturbed by the evidence from the Governor of the Bank of England that he was kept in the dark over the contents of the White Paper to the extent that he had 'no idea' what it would contain, or even when it would be published, only a fortnight before publication. The Report looks to the Chancellor [Alistair Darling] to address why consultation papers on financial reform are now no longer jointly published, or even shared, with his Tripartite colleagues."

The report is being published just a day after another committee of MPs sharply criticised the Financial Services Authority's handling of the collapse of the Dunfirmline Building Society. Parliament's Scottish Affairs Committee yesterday said that while Dunfirmline's failure was ultimately its own responsibility, "It is also apparent that the FSA failed in its duty to adequately warn Dunfirmline of the dangerous path it was taking."

The FSA now faces a huge challenge as it struggles to recruit staff and successfully reform its procedures, all the while knowing that the Conservatives – increasingly looking like the next government – have pledged to abolish it.

The Treasury Select Committee launched its investigation into the banking crisis and Britain's watchdogs earlier this year.

Of the new financial stability council and the tripartite regulatory system outlined in the White Paper, the report says: "There is still a lack of clarity regarding who is responsible for systemic oversight, and who has executive authority in a crisis, a problem the committee first highlighted in the aftermath of Northern Rock's demise.

"Where before no one had a formal responsibility for financial stability, now many do – the Bank of England, the FSA, the Treasury, the Council for Financial Stability and the Bank's Financial Stability Committee."

The committee's Labour chairman, John McFall, said the FSA had "failed spectacularly" during the banking crisis, although he acknowledged that it had started to rectify its mistakes and is now far less willing to trust the banks than in the past.

Mr McFall and the committee are calling for action to be taken to ensure that no bank is "too big to fail", and suggest that the problem could be solved by introducing a "tax on size". The committee further calls for a debate to be held over whether to reintroduce laws that would prevent deposit-taking institutions engaging in risky activities such as proprietary trading.

Mr McFall declined to comment on the Conservative proposals or the Scottish report, saying he wanted to concentrate on his committee's findings. However, he did say: "I think in terms of the reforms, it is still a muddle."

An FSA spokesman said: "The report acknowledges that the FSA has proactively identified and rectified its historic mistakes and that the financial services sector has clearly felt this change in approach.

"The FSA has changed radically since it published an internal review in early 2008," he added.