The FSA should have the power to regulate financial advice given to public sector bodies, according to The Communities and Local Government Committee.
Its call comes in the wake of the collapse of the Icelandic banks which held around £1bn of UK public money when they folded in October 2008.
The Committee believes the regulator should monitor services provided by firms offering local authorities advice on how they manage their cash reserves and investments, the BBC reports. The FSA should also scrutinise the independence of these firms.
"As it stands, the FSA is powerless to intervene in the circumstances that led to a great deal of public cash being put at risk by the collapse of the Icelandic banks," said Dr Phyllis Starkey, chair of the committee told the BBC.
"Under current rules cash deposits and professional advice relating to such monies remain an 'unregulated' activity outside the FSA's remit.
"New legislation is urgently required to tighten the regulatory approach taken to treasury management advice and activity in the public sector."
Paul Bruns and Elaine Parkes
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