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City's shock as Sants walks out on the FSA before split

Boss quits 'early' and potentially damages the efforts to set up new financial regulatory regime

In a shock move that could damage the Government's attempt to create a radical financial regulatory regime, the Financial Services Authority's chief executive Hector Sants quit yesterday.

Two years ago, the Chancellor, George Osborne, pleaded with Mr Sants not to leave the City regulator until the new regime set up in the wake of the banking crisis was up and running.

This system is still almost two years away, although Mr Sants had already been appointed as the designated head of the Prudential Regulation Authority which will oversee banks. He will not now take that post.

City experts said Mr Sants' resignation will throw the finance sector into confusion. Jonathan Davies, at the City law firm Reynolds Porter Chamberlain, said: "The timing of Hector Sants' resignation is astonishing given that his remit was to deliver an orderly transition to the Government's new twin peaks regulatory structure. Finishing in June before the twin peaks model is in place really is leaving the job half done."

Others pointed out that Mr Sants had been criticised by MPs over his suitability to run the new PRA.

Michael Fallon, the senior Tory on the Treasury Select Committee, had declared his "deep reservations" about Mr Sants leading the organisation. But reports said Mr Sants had been frustrated by the slow pace of change.

Adair Turner, the FSA's chairman, said: "I am very sorry to see him leave, but I understand his decision now that he has delivered what he set out to achieve."

Mr Sants' departure follows a number of high-profile resignations from government enforcement agencies including John Fingleton at the Office of Fair Trading, Richard Alderman at the Serious Fraud Office and Margaret Cole from the FSA. There will also be a new Governor of the Bank of England in June 2013.

Mr Sants was paid £800,000 in 2011 including a performance-related bonus. A former UBS banker, he could earn considerably more than that if he returns to the private sector.

The FSA will not look to replace him ahead of its division into two new organisations. Martin Wheatley, who is lined up to head the consumer-facing Financial Conduct Authority and Andrew Bailey, who was due to be Mr Sants' deputy at the PRA, will oversee the final months of the regulator reporting directly to Lord Turner.

Mr Sants, who has been at the FSA for eight years, five as chief executive, will leave at the end of June. He said: "I am proud of what the FSA has achieved during my time in charge, through incredibly challenging times."

His replacement at the PRA will be appointed by the Treasury on advice from the Bank of England. Mr Osborne said: "I am very grateful for all the good work Hector has done. He has been an outstanding public servant. He has found a natural moment to seek new challenges after eight years at the FSA and having successfully overseen planning for the transition to the new supervisory structure."

Sir Mervyn King, the Governor of the Bank of England, said: "I am sad Hector Sants has decided to stand down. I am very grateful to him for staying on longer than he had planned."