Britain's Financial Services Authority regulator should be abolished and the Bank of England put in full charge of supervising financial institutions, opposition Conservatives said yesterday.

The proposals contrast with government plans to entrench the current tripartite system under which responsibility is shared between the FSA, the Bank and the Treasury and risk undermining the regulator with an election due within a year.

The Conservatives are tipped to win the election.

"We will abolish the Financial Services Authority and the failed tripartite system and give the Bank of England the responsibility for maintaining financial stability and the tools to do it," opposition finance spokesman George Osborne said.

"We will give the bank responsibility for the prudential regulation of all our banks, all our building societies and other significant financial institutions including insurance companies," he added in a speech.

"Crucially this will bring together the operation of monetary policy with the regulation of the banking system."

Finance minister Alistair Darling earlier this month proposed setting up a Council for Financial Stability to coordinate the work of the three groups.

The tripartite structure was set up 12 years ago when Labour came to power, but critics argue it has been found wanting in the credit crisis which has led to the government providing billions of pounds to bail out the banking sector.

Britain holds large stakes in RBS and Lloyds Banking Group, created by the merger of banking groups Lloyds TSB and HBOS, following last year's banking crisis. It also owns Northern Rock bank after a rescue.

Osborne said there should be a review of competition issues in retail banking before any decisions were made on how to dispose of the stakes. He has previously floated the idea of breaking up the banks to avoid creating overly-large groups.

"I think we need to have a strategic view of the kind of banking system we want at the end of that process," he said.

"I think it is sensible, given the consolidation that has happened in the retail bank sector over the last 18 months that through the OFT (Office of Fair Trading) we ask the Competition Commission to do a focused review on that to inform our process of selling the bank shares," he added.

On the broader issue of separating retail and investment banking operations, Osborne said this must be assessed on an international basis.

"I believe there is a case for separating some of the riskier investment banking activities, such as large scale proprietary trading from retail banking, but that it would not be sensible or indeed effective to impose separation unilaterally," he said.

The FSA defended its work.

"The FSA's current responsibility is to ensure effective prudential supervision and consumer protection and we believe that our integrated approach to understanding the whole business models of banks and other financial institutions helps to achieve that," it said.

Some commentators said the argument risked clouding the big issues.

"This is deckchair shuffling. You are talking about changing the logo on the business card of people who do prudential supervision," said Simon Gleeson, a partner at law firm Clifford Chance.

"What needs to be done is a lot of detailed work on risk weightings of bank capital but this does not make headlines," Gleeson said.

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