The UK Government has announced its intention to scrap the Financial Services Authority (FSA) and hand greater powers of scrutiny, including prudential regulation, to the Bank of England.

Chancellor of the Exchequer George Osborne last week promised the new UK coalition Government will follow through on a Conservative Party pledge to reform the existing tripartite regulatory system set up in 1997.

Under the plan, the Bank of England will take over supervisory functions previously undertaken by the FSA and the UK Treasury.

Insurance brokers are likely to come under the supervision of a new Consumer Protection & Markets Authority, according to the British Insurance Brokers Association.

FSA CEO Hector Sants will serve as the new prudential regulator’s first CEO when the transition to the new system is completed in 2012. He will also become a Deputy Governor of the Bank of England.

Mr Osborne last week listed the shortcomings of the existing UK regulatory system after the global downturn forced the nationalisation of some of its biggest lenders.

“At the heart of the crisis was a rapid and unsustainable increase in debt that our macroeconomic and regulatory system utterly failed to identify, let alone prevent,” he said.

“No one was controlling levels of debt and when the crunch came no one knew who was in charge.”

The FSA has come out in support of the reform, with Chairman Lord Adair Turner citing a need to “bridge the gap between macro-prudential policy and the supervision of individual firms”.

“The FSA now has the clarity of direction and timescale as well as the leadership that we need to meet the challenges ahead,” he said.