Hector Sants has decided to quit as the head of Financial Services Authority watchdog in June, leaving authorities to plug a gap in their regulatory framework as he was due to take on another key administrative role.

The FSA is to be replaced by two new regulatory bodies after it was blamed during the 2007-2008 financial crisis for not spotting major flaws at UK banks, such as Royal Bank of Scotland and Lloyds , which ended up being rescued with 66 billion pounds of taxpayers' money.

The Prudential Regulation Authority (PRA) will look at company-specific risks and will be housed within the Bank of England (BoE), while the separate Financial Conduct Authority (FCA) will focus on consumer protection.

Sants was due to become head of the PRA once the FSA is formally disbanded in 2013, as well as becoming deputy governor designate at the BoE, and his surprise departure will leave the Bank with a hole to fill.

The Bank will work closely with HM Treasury in searching for the first chief executive of the Prudential Regulation Authority who will also be the deputy governor with responsibility for prudential regulation, the BoE said in a statement.

The FSA added that the BoE's Andrew Bailey would take over Sants' role in the meantime in running the part of the FSA that will become the PRA.

WAVE OF DEPARTURES FROM FSA

Sants joined the FSA in May 2004 having worked at investment bank Credit Suisse .

His departure from the FSA follows that of the regulator's top enforcer Margaret Cole, who had raised industry hackles by radically altering how market abusers are pursued. Cole was instrumental in pushing financial crime to the top of the FSA's agenda as the watchdog sought to ditch its reputation for light-touch regulation.

Others to have left in recent months include Alexander Justham, who was the FSA's director of markets, and Thomas Huertas, who had run the FSA's international division.

Analysts said Sants' departure put the FSA in a difficult position, and creates uncertainty in the City of London financial district about the direction regulation will take.

Change is traumatic for any organisation and the FSA is no different. Ongoing uncertainty about who will be at the helm during a period of radical regulatory change is bad for the FSA and bad for the City, said Greg Brandman, a partner at law firm Eversheds.

Ben Blackett-Ord, who heads regulatory consultancy firm Bovill, said the departure came at a tricky time as the FSA still had much work to do in establishing Britain's new Twin Peaks regulatory framework involving the PRA and the FCA.

It has a long way to go to put Twin Peaks regulation into practice and to demonstrate that this is indeed the right way to go. Hector's resignation will not make this any easier, he said.

An FSA spokeswoman said Sants would go on six months of gardening leave from June onwards.

He's looking for one more big executive role, in either the public or private sector, she added.

(Reporting by Sudip Kar-Gupta; Editing by Fiona Shaikh and Hans-Juergen Peters)