Osborne scraps FSA in city shake-up

Osborne announced the abolition of the Financial Services Authority in a shake-up of City regulation which he said would produce "a new settlement between our banks and the rest of our society - a fairer settlement in which the banks support the people, instead of the people bailing out the banks".

Regulatory powers will be returned to Threadneedle Street in London with the creation of three new bodies within the Bank to deliver prudential regulation of financial firms, financial stability, and consumer protection.

In his first Mansion House speech as Chancellor, George Osborne said uncertainty over regulation must be dispelled to allow a return to more normal lending and to meet the Government's broader economic goals.

The "tripartite" system introduced by Gordon Brown in 1997, which shared responsibilities between the Bank, FSA and Treasury, had "utterly failed to identify, let alone prevent" the rapid and unsustainable increase in debt which led to the financial crisis, Osborne said.

A new Prudential Authority, operating as a subsidiary of the Bank of England, will regulate retail and investment banks, building societies and insurance companies.

Bank of England Governor Mervyn King welcomed the reforms, saying the financial crisis had proved that putting prudential regulation, consumer protection and oversight of markets together in the FSA "didn't work in practice".