Nov. 10 (Bloomberg) -- Dividing the duties of Britain’s financial regulator, as opposition Conservative lawmakers have said they would, would be a return to the “dark ages,” its chief executive officer said.

In the strongest defense of his agency to date, Financial Services Authority CEO Hector Sants said in a speech yesterday that the model of an “integrated” regulator that supervises all financial companies’ business and capital rules is best. The FSA plans to go further and judge financial firms’ culture, he said. Senior executives could end up being banned if they don’t positively influence their companies’ culture.

“To undo the integrated approach to risk assessment would be to return regulation in the U.K. to the dark ages,” Sants, 53, said in the speech at Bloomberg’s London offices. “Failing to take into account the lessons learnt from the last two years would be grossly irresponsible.”

Lawmakers around the world, including in the U.S. and the European Union, are redesigning regulatory architecture in the wake of the worst financial crisis in a generation. Sants went further than his chairman, Adair Turner, who said he was “agnostic” about his agency’s future in light of Conservative plans to abolish it and return lender supervision to the Bank of England, should they win the forthcoming election.

‘Socially Useful’

Turner has suggested broadening the regulator’s traditional role. He argues that banks must be “socially useful” and should walk away from activities, no matter how profitable, that don’t benefit society. The regulator would act in the benefit of society to judge whether banks are efficient, he said in September.

“There is an emerging similarity between Sants’s views on supervision and Turner’s views on industry structure -- both seem premised on the idea that the regulator can somehow know the ideal structure for the industry, and that it can and should force firms into that ideal,” said Simon Gleeson, a regulatory lawyer at London-based Clifford Chance LLP.

Turner also floated the idea in August of a so-called Tobin Tax that was backed by Prime Minister Gordon Brown at the Group of 20 Nations’ finance ministers meetings in Scotland last week. U.S. Treasury Secretary Timothy Geithner said a “day-by-day” tax on speculation is “not something we’re prepared to support.”

Transaction Tax

“Any transaction tax faces massive difficulties and you couldn’t believe that that could be implemented on a national basis,” said Sants today in a separate speech at the London Stock Exchange Group Plc’s offices. “What we need is a debate on the problems first before we jump to solutions.”

James Tobin proposed a tax in 1971 on currency trading to deter speculation in the wake of the collapse of the Bretton Woods system of pegging currencies. Tobin, who died in 2002, won the 1981 Nobel Prize for his work on financial markets.

The FSA was created in 1997 by Brown as one of his first acts as then-Chancellor of the Exchequer. It was created to try to stop financial scandals such as the 1995 collapse of Barings Plc.

Sants’s speech yesterday “had a strong message that it’s not business as usual,” said John McFall, a Labour lawmaker who chairs the Treasury Select Committee, which criticized the FSA last year for systematically failing in its duty to supervise now nationalized lender Northern Rock Plc. “The banks are still on life support -- now’s not the time for a major upheaval.”

‘Light Touch’

The Conservatives argue that the FSA was too “light touch” before the financial crisis, and that neither it nor the central bank were monitoring risks to the entire financial system.

“We must learn the lessons of the crisis,” said a Conservative Party spokesman in an e-mailed statement. “We have always said that it would be important for the Bank of England to learn from the FSA’s experience and build on its expertise.”

Sants’s term as FSA CEO expires in mid-2010. A general election also must be held by then. He declined to comment today in an interview on whether he would seek a position in any new regulatory structure or stay at the FSA.

His comments “will not be well received by the Conservative Party and risk putting him on a collision course with a new government next year,” said Nathan Willmott, a regulatory lawyer at Berwin Leighton Paisner.

Judgments on Judgments

Since the financial crisis, the FSA has pledged to be a tougher, more intrusive regulator that “makes judgments on the judgments” of banks’ senior executives in all aspects of their business, from who they hire to how much they pay them.

Sants highlighted the FSA’s recent enforcement actions: in the 2008-2009 financial year, the regulator imposed a record 27.3 million pounds ($45.6 million) in fines. So far in this financial year, it has levied fines totaling 19.8 million pounds, higher than at the same point last year, Sants said.

“Would the police force cite higher numbers of crimes as evidence that they’re doing a better job?” said Willmott. “A key question is whether the FSA is hoping to see regulatory fines beginning to fall at some stage in the near future as a consequence of the better quality of supervision.”

Sants said people would go to jail through FSA prosecutions. The FSA typically pursues market-related crimes like insider trading, share-selling scams and false or misleading statements. It won its second criminal insider- trading case last week.

He mentioned, without going into details, two investigations that the FSA is conducting into the Royal Bank of Scotland Group Plc and the Lloyds Banking Group Plc, both of which are part-owned by the government.

RBS and Lloyds said in documents that the FSA is looking into statements made before RBS’s and HBOS’s rights offerings last year. Lloyds agreed to buy HBOS last year in a government- backed takeover at the height of the financial crisis.

To contact the reporters on this story: Caroline Binham in London at cbinham@bloomberg.net

Last Updated: November 10, 2009 08:41 EST