The Conservatives had called for a review of the financial watchdog in the run up to the election and wanted to carve up the FSA’s powers, handing banking oversight to the Bank of England.

Other proposals would have seen the creation of a new consumer protection body.

While chancellor George Osborne was eager to push ahead with the plans, it is believed that opposition from new business secretary Vince Cable saw the plans scrapped – for now at least.

Berwin Leighton Paisner’s head of financial services Sidney Myers said: “I think this is a good thing. Along with a lot of other people I felt the Conservative’s plans were at best unclear. I think that, for all its faults, the financial community believes the FSA does a good job, and they would prefer to deal with one regulator rather than a multitude of them.

“Also, the FSA is looking for a new chief executive and I imagine there’ll be a lot more interest in that position now.”

Myers added: “A big shake-up would’ve created more work for lawyers, but from our clients’ perspective they’ll be quite pleased.”

Other City figures believe the new system would have posed a bureaucratic nightmare for major banks like Barclays, which have both a high street and investment banking arm.

“It makes much more sense to keep things as they are,” said one former FSA enforcer, now working with a City firm. “For many people in the City it’s a case of best the devil you know. The FSA has become more aggressive recently, and that’s been appreciated by the consumer lobby. Staff in senior positions are also now far more likely to stay.” 

Not all were in agreement, however. Jeremy Summers, a partner in the business crime and regulation team at Russell Jones & Walker, said the Tory U-turn signals a major setback for anti-fraud capability in the UK.

“One of the potential consequences of  the planned break up was the possibility that FSA enforcement would be moved into a new national fraud agency incorporating the SFO and perhaps other law enforcement agencies.

“There seems to have been something of a media turf war between the SFO and FSA recently positioning to take the lead in any such agency, and a growing consensus that this agency is needed.  If it’s now to be shelved that might be a serious setback in the UK’s future anti-fraud capability.”

Other commentators have suggested that, while plans to scrap the FSA have been shelved, dramatic changes to the regulatory landscape could still be in the pipeline.

Jacqui Hatfield, a regulatory Partner at Reed Smith, expects a narrowing of banking activities in coming months.

“The Conservatives have been openly in favour of the Volcker rule, which would restrict banks from making certain kinds of speculative investments which are not on behalf of their customers,” she said.

“The Conservatives have indicated that if the US agree to it – which is likely – they would too. They wouldn’t wait for a wider international agreement on the subject.

“The Liberal Democrats want to have a Glass-Steagall barrier in place, separating retail banks from investment banks. A narrowing of banking activities is inevitable in my view – it’s a question of when, rather than whether, it will happen.”

The latest reports suggest a new committee could be created – made up of representatives from the FSA, the Bank of England and other independent experts – which would have the power to intervene in the FSA’s decision-making process.