The attack on the board from the Securities and Futures Authority and the Investment Management Regulatory Organisation (Imro) is the most damaging yet faced by the regulator.
The row was fuelled by a speech last night by Christopher Sharples, chairman of the authority, at his members' annual dinner.
Mr Sharples told guests that he agreed with some comments from Labour's City spokesman, Alistair Darling, about the difficulties of making the present regulatory system work.
At present, regulators such as the SFA or Imro are responsible to the Securities and Investments Board. In turn, the SIB answers to the Treasury. But Mr Sharples said this system was "propagating a situation where genuine accountability is being replaced by regulation of regulation and buckpassing".
"Duplication of effort becomes the norm, reactions to new developments slow down, confusion is created in the minds of overseas counterparts, regulatory costs compound," Mr Sharples said.
The focus should be to strengthen the front-line watchdogs such as the authority , but uniting all regulators in one body, as Mr Darling had proposed, would be counter-productive. A single agency would be less flexible, less pragmatic, slower to respond and "unable to distinguish between totally different philosophies needed for dealing with wholesale markets at one end and packaged products at the other."
The answer lay in reducing duplication of effort and costs. If the three tiers of regulation were to remain their roles had to be delineated more clearly.
Mr Sharples declined to comment further on his speech. A similar view was expressed last night by Phillip Thorpe, chief executive of Imro. He said: "I am concerned. Although we have a good relationship with SIB, I think it does at times stand in the way of full accountability."
The Securities and Investments Board said: "It is not really possible to comment about a speech which we have not been able to study first."