The Treasury Select Committee (TSC) has said allowing the new regulator to publish early warning notices poses a risk to ‘natural justice' and urged the government to reconsider the issue.
The Financial Services Bill, which amends existing legislation to change the regulatory regime, recently began its journey through Parliament and is currently in its Public Bill Committee stage.
In its report on the government's response on the Financial Conduct Authority (FCA), one of the proposed successors to the FSA, the TSC outlined some of its key concerns.
It said the publication of the early warning notices, before a final decision has been made in the enforcement process, risked "unreasonable reputational damage" to firms who were found to be innocent.
The TSC added: "We are also mindful of the risk to natural justice, given that in such a case the regulator may be investigator, judge and jury.
"We therefore recommend that the government continue to consult on its proposed power for the FCA to issue early warning notices in respect of investigations into specific firms."
The committee, chaired by Andrew Tyrie, also continued to call for the FCA to have more accountability to Parliament, saying the its board should publish full minutes of each meeting and suggesting its CEO should be subject to pre-appointment scrutiny by the Treasury Committee.
It also said the FCA board should be responsible for responding to requests for factual information and papers from Parliament and said the committee should be able to request retrospective reviews of the FCA's work.
"The Committee remains deeply concerned that this legislation is being rushed," Tyrie said.
"The structure and objectives of the FCA will sit at the heart of this new regulatory system. Unless sufficient time is given to getting these reforms right, we could end up, once again, with a defective regulatory framework."
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