The move, which is sure to anger business secretary Vince Cable who has voiced support for the watchdog, could be the first big test of the new Lib-Tory coalition.
Whitehall sources say Osborne is keen to fall into line with other nations, where the central bank has control over financial regulation.
This was the case in the UK until Gordon Brown severed the ties, making the FSA independent. The plans have been seen as a signal of the Tory intent to shake up current financial regulation, which has been branded partly responsible for the financial meltdown.
Speculation over the future of the department has gone into overdrive since the Queen’s speech last month, in which she said “oversight of microprudential supervision” would fall under the remit of the Bank of England.
The Tories have long been critical of the FSA, believing the role is better fulfilled centrally, but the body appeared to have been thrown a lifeline by the Lib Dems, who stood firmly behind it during coalition talks. It is not clear, if the plans go ahead, whether the FSA would be maintained in a lesser role or scrapped altogether.
A Tory spokesman told City A.M. no final decision has been made on the future of the regulator but that detailed plans were being drawn up.
He said: “The coalition agreement is that we are committed to reforming financial regulation to help prevent a repeat of the financial crisis.
“We are developing detailed plans to achieve that commitment and will announce more at the Mansion House speech later this month.”
FAST FACTS | FSA
• The FSA was given powers over regulation in a “tripartite” system by Gordon Brown in 1997.
• It is an independent body and receives no government funding.
• It is accountable to the Treasury.