The tripartite system of financial regulation that Gordon Brown created when Labour came into power ten years ago directly contributed to the current financial crisis and made it worse then the recession began, an influential report claimed today.

The long-awaited report from the House of Lords economic affairs committee, containing some of the country’s most respected economists, criticises the separation of regulatory responsibilities and powers from the Bank of England when it was made independent 12 years ago.

The report criticises the banking and financial services tripartite regulatory regime that was created when City oversight was split between the Bank, the Financial Services Authority and the Treasury.

That move handed the majority of regulatory supervision to the FSA, but today the committee notes an inadequate definition of roles and responsibilities at all three constituent parts of the system.

On Monday the Conservatives initially declined to comment on the report. The party is expected to use the report on Tuesday to disprove the prime minister’s claims he is the right man to guide the country out of the financial crisis.

A separate report from Sir Martin Jacomb – former director of the Bank – for the Centre for Policy Studies – goes further than peers in recommending the FSA become a subsidiary of the Bank of England.

He claimed that a failure to notice a build of up debt that ultimately led to the collapse of Northern Rock under the tripartite scheme would not have happened under such a system.

“It is to be hoped that the government will accept that the tripartite arrangement was a mistake, and that responsibility for the stability of the financial system must be entrusted to an agency with no other role, an agency within the Bank of England which can use its powers to discharge the duty effectively and efficiently,” Sir Martin said.

“Only then can we be confident that the financial system will be better able to withstand the next financial crisis.”

In their report, the committee members argue that the FSA focused on consumer protection and failed to identify and alleviate risks to the financial system by mounting debt and bank’s ventures into “complex and opaque financial instruments”.

While they do not call on new legislation, they demand change to the tripartite supervisory system “as quickly as possible”.

“In particular, the committee recommends that the government should return responsibility for macro-prudential supervision from the FSA to the Bank of England,” they write, calling for a financial stability committee to be chaired by the Bank’s governor and include senior representatives from Treasury and FSA.

Today’s report also suggests:

• Increases in regulatory capital requirements for assets on banks’ trading books
• Central reporting and clearing of credit default swaps
• Greater oversight by the British authorities of UK branches of multinational banks

And it also recommends the development of policies to:

• Counter pro-cyclicality in existing regulations
• Regulate and supervise liquidity
• Improve bank governance
• Remove agency ratings from capital regulations

Lord Vallance, chairman of the committee, explained there was a “strong case” for reform of the supervisory and regulatory mechanisms in the UK banking and financial sectors.

“We need to acknowledge that the regulations and their application contributed to the crisis, and made it worse when it came, because among other things, they had a pro-cyclical bias, did not pay enough attention to liquidity, and were wide open to regulatory arbitrage,” he said.

“It is also clear that in the UK the tripartite authorities of the Bank of England, FSA, and the Treasury failed to maintain financial stability, in part because it was not clear who was in charge in a crisis and because not enough attention was paid to macro-prudential supervision – oversight of the aggregate effect of the actions of individual banks – in the period when ‘boom and bust’ was mistakenly assigned to history.

“We recommend early action to improve focus on financial stability in future. One way to help achieve this would be to return responsibility for macro-economic supervision from the FSA to the Bank.”

The Treasury could not be reached for comment on Monday.