Tories call for abolition of City finance watchdog

White Paper sets out plan to end 'tripartite' regulation of Britain's financial industry

An incoming Tory government would abolish the Financial Services Authority and hand the power to regulate banks to the Bank of England, under plans to be published today.

George Osborne, the shadow Chancellor, promised to sweep away the "failed" three-way split brought in by Gordon Brown in 1997, under which financial regulation is shared between the FSA, the Bank and the Treasury.

The Bank would be in firmly in the driving seat under a Cameron government. The FSA, which is locked in a turf war with the Bank, would disappear, becoming part of a powerful new Consumer Protection Agency that would force banks and credit card companies to provide easily-understood information about charges and interest rates so people could shop around.

New powers for the Bank will fuel Labour suspicions about the increasingly close relationship between Mr Osborne and Mervyn King, the Bank of England Governor. However, Mr King would not enjoy untrammelled power on regulation under the proposals in today's White Paper. The Bank would set up a Financial Policy Committee, including outside experts, to work in parallel with the Monetary Policy Committee which sets interest rates. A new Deputy Governor would be responsible for regulation.

The Bank would regulate the pay structures, riskiness, complexity and size of banks, building societies and insurance companies. Those that put stability at risk would be forced to hold large amounts of capital to protect taxpayers. "This will effectively introduce a 'tax' on risky bonus structures that incentivise employees to seek short term profits at the expense of longer term stability," the Tory document says. There would be a similar approach towards banks judged "too big to fail". The salaries of Bank of England staff would be raised to ensure it attracts high calibre regulators, through a higher levy on financial firms.

A Tory government would order a Competition Commission inquiry before selling the state's shares in banks, a move that could see the break-up of the Lloyds Banking Group. Yesterday Mr Osborne promised a "change in culture" to ensure the Tories balanced the nation's books if they win power. In a BBC interview, he refused to rule out tax rises but said cutting spending was his preferred route.

A report out today warns that protecting health spending could result in tax rises or deep spending cuts in other areas. The Institute for Fiscal Studies and the King's Fund charity said that was the "inevitable" result of pledges by the Labour and Tory parties not to cut NHS spending in real terms after 2011.

Only large improvements in NHS productivity would alleviate the need for "hard decisions" about whether to cut other budgets or raise taxation over the period to 2017. John Appleby, chief economist at the King's Fund, said: "Both the Labour and Conservative parties have pledged to avoid cutting NHS spending in real terms from 2011 but this will come at a big price, whether in departmental cuts elsewhere or tax hikes."

The report says real increases in NHS funding averaging 2.5 per cent a year from 2011-17 could mean other departments facing annual budget cuts averaging 2.8 per cent, or about 16 per cent over six years.