The move, aimed at strengthening the accountability of the country's two main regulators, comes after the year-long review found many instances of lax oversight or inadequate responses to poor conduct by financial services providers.
In the 496-page document, Commissioner Kenneth Hayne said the new body, independent of the government, will have sweeping powers to conduct inspections of either regulator at will, issue notices to them to produce documents and deliver regular reviews.
The recommendation will still need to be approved by parliament, although Australia's coalition government on Monday pledged to take action on all 76 recommendations made in the final report.
"The current framework is heavily focussed on governance and financial accountability," Hayne said.
"None of the existing processes requires regular and systematic review of how well either regulator discharges its statutory functions or exercises its statutory powers."
The Australian Securities and Investments Commission (ASIC) is the corporate watchdog in charge of non-bank entities such as wealth managers and financial advisers whereas the Australian Prudential Regulatory Authority (APRA) looks after the banking sector.
"Given the importance and size of ASIC's remit, I have come to the view that a permanent oversight body is now required," Hayne noted.
"Similarly, the significance of APRA's work to the strength of Australia's financial system and the interconnectedness of its work with that of ASIC... mean that it too should be subject to more consistent and rigorous assessment."
Hayne is in favour of the current "twin peaks" regulatory model but still insisted on the need for the new oversight body, which will be required to prepare a comprehensive assessment at least biennially.
The body could also prepare specific reports on an ad hoc basis if it considers that necessary, Hayne noted.