A top advisor to David Cameron has called for tighter regulation for business and the tougher control over banking systems to prevent another financial meltdown.

Sir David Arculus, the former chairman of Severn Trent and one-time ‘Red Tape Tsar’ for Tony Blair, told a Birmingham audience that the turmoil in the world’s markets proved regulation was necessary to stop reckless financial trading damaging the economy again.

“I think one of the lessons from the recent financial crisis is that good regulation is actually the underpinning of all economic activity,” he said. “What’s recently happened in the financial world demonstrates, in my view, the folly of simplistic cries for deregulation and the great need for better and more targeted regulation.”

Speaking at the Lunar Society’s annual dinner at Birmingham Council House on Tuesday night, the Solihull-born businessman dismissed concerns that an increase in regulation would hamper enterprise.

“A lot of people claim that too much regulation is killing their business but conversely what we have seen during the credit crunch is that bad or lack of regulation can actually threaten the economies of entire countries,” he said.

Sir David argued that a sweeping reform of existing regulatory bodies was needed to improve their future performance, and called for the establishment of a strong independent body to counterbalance private sector regulation.

The influential businessman also stressed the importance of greater interaction with EU legislators in Brussels - a city he termed “the biggest regulation factory.”

Sir David is particularly well positioned to understand the intricacies of regulatory legislation - although he believes in greater regulation, he also campaigns for less red tape and bureaucratic procedures, arguing that the two are not mutually incompatible.

Sir David argued for an increased focus on regulatory budgeting - measuring the cost of regulation so that a cost-benefit analysis can clarify the issues of red tape and overlapping laws.

The businessman served for four years as Chairman of the Government’s Better Regulation Task Force from 2002-2006 before switching sides last month when David Cameron announced that Sir David would be examining ways in which the Conservative Party could cut bureaucracy.

In his keynote address the businessman drew upon his experiences with both Labour and the Conservatives to call for enhanced mechanisms for holding government departments to account, including strengthening the resources and powers of Parliamentary Select Committees. However, Sir David has himself faced problems as a result of the regulatory system.

In March 2006 he resigned as deputy president of the top business lobby group CBI, following revelations of over-charging customers during his tenure at Severn Trent.

Sir David presided over the company from 1998 to 2004, during which time Severn Trent overcharged customers by £42 million in what industry regulator Ofwat called “deliberate miscalculations”.

While Sir David was cleared of having any knowledge of the scandal, he told the CBI: “I believe I must bear my share of the responsibility for events in the organisation.”

His departure was a blow for the lobbying confederation, who had hoped Sir David would become their president.