Stay of execution for the FSA

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The City watchdog has received a stay of execution from the new coalition, but will see its powers stripped in favour of a beefed-up Bank of England.

Under the terms of an agreement reached between the Conservatives and Liberal Democrats, the central bank will be handed control of macro-prudential regulation - that relating to the underlying health of the financial sector.

No direct mention is made of the Financial Services Authority (FSA) in a joint document released by Downing Street today.

But new Business Secretary Vince Cable explained: "The essential point is that the FSA remains intact but the governor of the Bank of England has unambiguous overall responsibility."

The move will serve as a reprieve, of sorts, for the FSA, which had faced being axed under Tory plans.

But those opposed to the creation of a more powerful central bank may balk at the wording of the agreement.

It states: "The parties agree that the regulatory system needs reform to avoid a repeat of Labour's financial crisis.

"We agree to bring forward proposals to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential."

Elsewhere in the document, the coalition pledges to establish an independent commission tasked with looking at the possibility of breaking up large financial institutions into separate retail and investment banks.

"The commission will be given an initial time frame of one year to report," it states.

The coalition also vowed to crack down on the bonus culture in the City.

"We agree to bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector," the joint document reads.

A banking levy will also be introduced, according to the coalition.