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Chancellor George Osborne has confirmed that he will give the Bank of England the key role in regulating the UK financial sector.

Mr Osborne told the House of Commons that the current system of financial regulation had "failed spectacularly".

He added that Sir John Vickers, former head of the Office of Fair Trading, would look into the potential break-up of Britain's biggest banks.

Mr Osborne is due to give more details of his plans in a speech tonight.

The existing regulatory systems, led by the Financial Services Authority, will be dismantled.

Mr Osborne confirmed the plans in answer to a question from shadow chancellor Alistair Darling.

Mr Osborne said: "On the structure of regulation, our plan is to hand over to the Bank of England responsibility for macro-prudential supervision, that should never have been taken away from it."

Before the general election, Mr Osborne had suggested he would abolish the FSA.

It was thought possible that the regulator would be retained in some form, perhaps with a watered-down role of supervising individual banks.

However, on Sunday BBC business editor Robert Peston revealed that the government had decided to break up the FSA and make the part that monitors financial institutions a full subsidiary of the Bank of England.

The FSA has come in for criticism for not doing enough to prevent or limit the crisis in the financial markets.

Mr Darling told the Commons on Wednesday that the planned changes would lead to confusion and risked creating "a dog's breakfast of a regulatory system".

Mr Osborne also announced that a commission to look into the possible break-up of the big banks would by chaired by Sir John, a former member of the Bank of England's Monetary Policy Committee.

The independent commission will take at least a year to review whether casino-style investment banks should be split from deposit-taking institutions on the High Street.

Mr Osborne said that the commission would approach its task with an "open mind".

He is due to give his first Mansion House speech tonight, when he is expected to detail plans for a powerful new Financial Policy Committee at the Bank of England.

This could involve creating a new post, such as a chief executive of financial regulation, with the status of a third deputy governor of the Bank.

The chancellor may also confirm an intention to introduce a levy on banks, but full details are more likely to come in next week's budget.

The BBC's business editor, Robert Peston, said that the FSA was effectively being broken up.

"The part that's supposed to prevent banks taking dangerous gambles, which regulates and supervises them, will become a subsidiary or arm of the Bank of England.

"And the bits that are supposed to protect consumers and crack down on crooks will be injected respectively into a new Consumer Protection Agency and an Economic Crime Agency," our correspondent said.

Gordon Brown, made Chancellor when the Labour Party won the 1997 general election, created the FSA following criticism that the Bank had failed to sufficiently regulate the UK's financial system.

But there was criticism of Mr Brown's move from people who thought the change gave far too much power to a single body.

DATED: 16.06.10

FEED: BBC