Watchdogs are facing challenging transition, says FSA chief Sants

Choppy markets and European Union regulations will make the Government's plans to do away with the Financial Services Authority more difficult, the chief executive of of the regulator warned yesterday.

Hector Sants, who has been asked to run a new regulation unit at the Bank of England when it assumes the FSA's work, told the organisation's annual conference that the transition faced challenges.

"Achieving these goals will be a challenge, particularly since we are likely to be making these changes against the backdrop of a continued fragile marketplace," Mr Sants said.

"We must recognise that going forward, particularly in respect of supervision, the national entities will increasingly become an arm of European policy and thus, effective engagement with the European agencies is absolutely critical."

The Chancellor, George Osborne, confirmed earlier this month that the coalition would abandon Labour's tripartite system of regulation, comprising the FSA, the Bank and the Treasury, in effect making the FSA a subsidiary of the Bank.

Mr Sants, who said he would retire at some point over the summer, has since changed his mind and will continue to head the regulator and become a deputy governor of the Bank. The FSA was savagely criticised for failing in 2008 to spot the signs of the impending financial crisis, and for not acting quickly enough to prevent it. However, Mr Sants, a former investment banker, said yesterday that the new regulatory regime would continue the FSA's methods of reining in the excesses of the City.

"The new structure will create separate organisations to address conduct and prudential risk. We will thus need to ensure that these new organisations carry forward both the philosophy of 'outcomes based regulation' but also the necessary mechanism for making the required judgements," he added.

The FSA meeting was also told that the new regulator would continue its "more intrusive" approach to investigating financial wrongdoing. Since 2007, and in response to widespread criticism, the FSA has intensified its work in investigating market abuses and fraudulent activities. The effort has yielded several high-profile City figures, who have subsequently been convicted.

"There is no change to the FSA's policy agenda. We just spent the last three years learning the lessons of the crisis," Mr Sants said.