Treasury insiders today denied that plans by Alistair Darling to extend the role of the Financial Services Authority in policing banks and the financial system would risk sparking conflict between the FSA and the Bank of England.

Officials confirmed that a new Banking Act planned by the Chancellor for this autumn will give the FSA a wider remit encompassing the overall stability of the financial system, extending beyond its present powers over individual banks.

But insiders insisted that the change in the FSA’s role would not create an overlap with the Bank of England’s responsibilities for overall stability that could provoke clashes between the two key watchdogs.

The proposal could still inflame tense relationships between the Treasury, the Bank and FSA over the planned shake-up of regulation. However, officials say that the proposed measures in the impending Bill will not limit or undermine the Bank’s over-arching responsibility for ensuring overall financial stability.

In a change which officials say is mainly technical, the planned move will place on the FSA a statutory duty to consider the impact on wider stability across the financial system as it carries out its oversight and policing of individual banks and other institutions.

While the FSA would therefore have to consider implications for the wider system as a whole, it would remain the Bank’s job to oversee that system and ensure its stability, the officials insist.

The Government is also yet to address repeated protests by Mervyn King, the Bank’s Governor, that the Bank will continue to lack specific powers over banks or financial groups to allow it to exercise the responsibility for the system handed to it by previous legislation.

The latest controversy over the Chancellor’s imminent overhaul of financial regulation comes in a week when Mr King threw his weight behind Conservative claims that the present and proposed system for splitting powers and responsibilities between the Bank, FSA and Treasury is “a mess”.

The Governor this week publicly disclosed to MPs his irritation that he had not yet seen a draft of the White Paper due next week nor, he said, been consulted on its content.

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