Sants will step down by the end of the summer, the FSA said in a statement. He began his role in July 2007, weeks before problems emerged with subprime mortgages that triggered the credit crunch, and two months before a run on deposits at Northern Rock Plc, Britain’s first casualty of the crisis.

“When I was appointed I told the board that I planned to serve as CEO for three years, and I intend to stick to that timetable” said Sants, 54, in the statement. “Those three years have encompassed the most extraordinary circumstances for a financial regulator, and I am very proud of the manner in which the FSA rose to the challenge of dealing with such unprecedented turbulence across global financial markets.”

The opposition Conservative lawmakers in the U.K. have pledged to abolish the FSA and carve up its duties should they win this year’s election, which must take place by June. They said they will return banking supervision to the Bank of England, arguing that the FSA’s lax oversight of banks contributed to the crisis.

The FSA was created by Prime Minister Gordon Brown in 1997 in what was one of his first undertakings as the then-Chancellor of the Exchequer. The Labour government had swept to power the same year, promising to overhaul financial services so scandals like the collapse of Barings Plc and the closure of the Bank of Credit and Commerce International wouldn’t happen again.

‘Orderly Succession’

Brown’s spokesman Simon Lewis told reporters in London that there would be an “orderly succession” to appoint a replacement for Sants.

“Taken with the Conservative Party threat to break up the FSA, Hector Sants’s resignation risks the regulator being viewed as a lame duck,” said Jonathan Davies, a regulatory lawyer at London-based Reynolds Porter Chamberlain LLP. “This is not the environment in which the future of financial services regulation can be left hanging in the balance for months, it risks sowing too much confusion.”

Sants, a former executive at Credit Suisse Group AG, didn’t say where he would go after a period of six months’ leave that he must complete after departing. His resignation comes at a key time for regulation both in the U.K. and across the world, where policy makers are trying to grapple with rules in the wake of the worst financial crisis in a generation.

‘Dark Ages’

Sants has been critical of the Conservative plans in recent months, describing them in November as a “return to the dark ages.” He also said they made recruiting more FSA officials a challenge.

“Sants carried the can for failures at the FSA, but he did plenty of good stuff too,” said James Perry, a lawyer at Ashurst LLP in London. “As a poacher-turned-gamekeeper, he knew some parts of the market, particularly equity, very well indeed.”

A cross-party parliamentary committee criticized the FSA for “systematically failing” in its duty to supervise Northern Rock in January 2008. Since then, Sants made the FSA undertake an internal audit into what went wrong, and personally apologized for FSA failings.

He initiated a system of tougher, more intrusive regulation where the FSA scrutinizes all aspects of banks’ business models, from whom they hire to how much they pay them, saying last year that people “should be frightened” of the FSA.

‘Mixed Bag’

“In terms of his legacy it’s a mixed bag: he sharpened up and refocused the organization but as a result of the financial crisis, firms are struggling with a lot of heavier regulation that he is a proponent of,” said Ian Mason, a regulatory lawyer at London-based Barlow Lyde & Gilbert LLP, who left the FSA as an enforcement official in 2005. “He’s a very decent guy and popular with staff. He’s perceived as a good manager.”

His replacement will be chosen jointly by the U.K. Treasury and the FSA’s board. The Treasury declined to immediately comment on whether it will begin a selection process before the election, and the FSA said a replacement would be selected in due course.

“They may begin the wheels of it but candidates of standing will wait to see the outcome of the election and what the new role will entail,” Mason said of the selection process.

While Sants has no official deputy, the most senior FSA employees under him are Sally Dewar, managing director of risk; Jon Pain, managing director of supervision; and Mark Norris, the chief operations officer, according to the FSA’s Web Site.

‘Strong Purpose’

“He will leave behind an organization with strong purpose and clear strategy,” FSA Chairman Adair Turner said in the statement. “We will continue to work together to deliver the FSA’s reformed and intensive supervisory approach and drive forward the global regulatory reform agenda.”

Turner has been more visible than Sants in recent months on the world stage. Turner is heading a group at the Financial Stability Board, a collection of policy makers and regulators from the Group of 20 Nations, examining what to do about banks that are deemed too big to fail.

In addition to the Conservative plans to split up the FSA, the regulator also faces a new framework created by the European Union, which would bolster regional agencies’ powers to oversee banks, securities firms and insurers.

Sants had a career in the securities industry before joining the FSA in May 2004 as its managing director of wholesale and institutional markets. He was a regional CEO at Credit Suisse First Boston and worked previously with Donaldson Lufkin & Jenrette before it merged with CSFB in 2000.

He said in 2004 that he was joining the regulator as a committed Christian “to give something back to the system which had provided me with an interesting and worthwhile career.”

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