Alistair Darling announced a strengthening of the City regulator but no new powers for the Bank of England in his long-awaited proposals on banking reform yesterday.

The Chancellor rejected calls to scrap the tripartite system set up by Gordon Brown in 1997 in which responsibility is shared between the Bank, the Treasury and the Financial Services Authority.

Instead, he wants to give the FSA new enforcement measures meant to monitor individual companies and opted not to provide further powers for the Bank to protect the whole economy from excessive risk.

George Osborne accused him of ducking the difficult decisions on how to clean up the City and warned that a Conservative administration would overturn his proposals and hand the Bank overall control of regulation.

Vince Cable, the Liberal Democrats’ Treasury spokesman, described the White Paper on financial regulation — which will not be implemented until after the election — as Mr Darling’s “living will”.

The Chancellor’s proposals include:

• the formation of a financial stability council where the Bank, FSA and Treasury would meet four times a year to discuss financial stability and long-term risks;

• the granting of enforcement powers to the FSA to vet pay deals of bank executives. Should the City watchdog find that an executive’s pay encourages the financier to take risky investment decisions, it can order the lender to put aside more capital in reserve. Any such requirement would reduce a bank’s profitability and, the Treasury believes, act as an effective veto;

• the FSA acting as a “backstop” to bad lending practices, preventing lenders from overextending themselves;

• extending a ban on short-selling, a practice blamed for driving down bank shares, until the end of 2011;

• a new national money guidance service giving consumers “free impartial financial advice”. It will be paid for by a levy on the financial sector.

“We need a change of culture in the banks and their boardrooms, with pay practices that are focused on long-term stability and not short-term profit,” Mr Darling told the Commons.

Mr Osborne said that the Chancellor had “ducked every difficult question” on reform, leaving to the next government detailed decisions on the size of banks, what capital they should have and how to protect the taxpayer from their future failures.

“We have more of a white flag than a White Paper,” said Mr Osborne, who described the proposals as “a complete surrender of the Government’s responsibility to fix the system of regulating the City it created and which so spectacularly failed”.

Mr Osborne promised to spell out the Tories’ detailed alternative within a fortnight. A senior source close to the Shadow Chancellor said it would establish clear lines of accountability and place the Bank in overall charge.

Mr Cable said that the reforms were a missed opportunity and that the Chancellor should have insisted on a better deal from the banks in return for bailouts funded by the taxpayer. “There will be champagne corks popping all over the City this afternoon. The Chancellor’s statement proves it really is business as usual,” he said.

Mr Darling was also accused of snubbing Mervyn King, the Bank Governor, after it emerged that the Treasury had sent him a copy of the 170-page White Paper only in the past few days.

Lord Myners, the City Minister, claimed at a Treasury Select Committee meeting yesterday that Mr King and Mr Darling had a “very constructive relationship”.

Andrew Tyrie, a Conservative member of the committee, asked Lord Myners whether the Bank had been fully consulted over the drawing up of the draft legislation.

The minister said: “That depends what you mean by consultation. We have had very lengthy discussions over core issues. We didn’t suddenly spring this on the FSA and the Bank.”

Colin Breed, a Liberal Democrat member of the committee, said that the entire report was “underwhelming” and that it had created more committees than there were banks to supervise.

Mr Tyrie added: “This is a very insubstantial document and really just rearranges the deckchairs on the Titanic of a regulatory system which has been failing ever since it was set up a decade ago. The Governor of the Bank of England has made it clear that his new responsibilities need new powers in order to fulfil them. There are no new powers.”

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