The City watchdog has been accused of "serious misjudgment" in its failure to step in and block Royal Bank of Scotland's disastrous takeover of Dutch rival ABM Amro.
A report by MPs on the Treasury Select Committee slammed the Financial Services Authority (FSA) for the part it played in the failure of RBS, which saw the taxpayer stump up £45.5 billion to prevent it from collapse.
The committee said the FSA's biggest fault was not intervening to stop the "calamitous" near-£50 billion ABN takeover and is urging the Government to legislate to ensure the regulator is explicitly required to approve major bank acquisitions to prevent a repeat of the fateful deal.
But the FSA comes under widespread criticism in the report - made into the FSA's own report into the collapse of RBS - saying its failures in the saga "amount to a serious indictment" of bosses at both the bank and the regulator.
The committee also hit out at the FSA for needing to be strong-armed into producing a report, which was published last December. The FSA originally decided not to produce a report into the RBS collapse until bowing to Parliamentary pressure, but the committee found the FSA's report did give a fair picture of events surrounding the bank failure and subsequent bailout.
An FSA spokesman said the regulator would "consider the report's findings and recommendations in detail", adding the FSA had put in place "a completely new model of supervision since the financial crisis".
The committee's report said: "It should have intervened at an early stage. It should and could have intervened at a late stage, albeit with more difficulty." It added: "The FSA's failure to assess the risks of the deal represents a serious misjudgement on the part of the supervisory team and the senior management. We need a regulator with the self-confidence to intervene."
Trade union Unite said "the reckless folly of RBS management and lax regulation" cost 30,000 jobs at RBS since its collapse. As well as its £45.5 billion bailout, which has left RBS 80% owned by the state, the bank was also covered by a £282 billion Asset Protection Scheme paid for by the taxpayer. It said this week it was exiting from the scheme, which was originally designed to insure it against losses on toxic assets.
Committee chairman Andrew Tyrie indicated that he did not believe the critical report should stand in the way of FSA chairman Lord Turner being considered as a candidate for Governor of the Bank of England.
Asked whether the criticisms made Lord Turner a "poor candidate" for the Bank job, Mr Tyrie told BBC Radio 4's Today programme: "I think Lord Turner himself said that he should have grasped the need for a much more substantive public explanation than a one-page news release when they decided that no enforcement action was needed against RBS. The fact that he has made that admission was a very sensible thing. It was very sensible of him to do that and also it signals to us that here is somebody who has grasped the mistake and is acting on it. If you are going into battle, it is a good idea to have a general who has fought the odd skirmish."