A sweeping shake-up of banking regulation has met with a cool reception from City lawyers with doubts raised about the move to largely abolish the Financial Services Authority (FSA).

The overhaul, which was announced last night (16 July) by Chancellor George Osborne at the annual Mansion House speech, will see a major increase in power for the Bank of England, which will take on a new remit to police market risk.

The overhaul will see the FSA lose some of its powers to a new agency, the Consumer Protection and Markets Authority. The rump of the FSA will become a new agency, dubbed the Prudential Regulatory Authority, which would be in place by 2012. This body, which takes on responsibility for day-to-day supervision of banks and financial services groups, will operate as a subsidiary of the Bank of England.

The new regime will replace the tripartite system introduced by former Chancellor Gordon Brown in 1997, which effectively split fiscal, monetary and regulatory policy between the Treasury, the Bank of England and the FSA.

The announcement ends months of speculation regarding the FSA's future after the Conservative Party last year pledged to abolish it following widespread criticism of its role in the run-up to the banking crisis.

However, the incoming coalition Government had since floated the idea of largely maintaining the regulator and many in the City, including financial services lawyers, had argued that the FSA should be given a chance to reform itself rather than risk further upheaval.

Clifford Chance partner Simon Gleeson (pictured) told Legal Week: "The announcement does have a shuffling-of-deckchairs feeling to it. It might not have all that much impact on most financial services firms which may not even notice a change."

He added: "What will be interesting to see is how the new system will correspond with the European Union regulatory model."

Osborne was able to offset some criticism of the move with the surprise announcement that the FSA's chief executive, Hector Sants, had been persuaded to stay on for three years to oversee the creation of the new agency.

Denton Wilde Sapte financial markets and regulation head Robert Finney said: "The Chancellor's new approach is a halfway house between the unpopular (in the City) proposal to dissolve the FSA and replace it with regulation by the Bank and a (rump-FSA) consumer protection agency, and on the other a face-saving formula of charging the Bank with clear responsibility for financial stability and macro-prudential supervision but largely leaving the FSA be.

"The new approach has the disadvantage of fomenting instability at the FSA, yet potentially achieving little."

The announcement comes in the same week as the Government confirmed the membership of the new independent commission charged with investigating structural reform of the banking industry.

The commission will be chaired by Sir John Vickers and supported by four commissioners: ex-Barclays chief executive Martin Taylor, financial journalist and author Martin Wolf, former JP Morgan banker Bill Winters and economist Clare Spottiswoode.