It’s a case of back to the future in London as the new Conservative-Liberal Democrat government decides to give more power to the country’s central bank and its governor Mervyn King, a move that you could argue is reward for past failure or ineptitude.

Those folk who brought you Northern Rock and all the other disasters of the financial crash, and allowed UK banks and the foreign subsidiaries operating there to play merrily in subprime mortgages, hedge funds, leveraged buyouts, now have total control of the whole box and dice.

Britain’s financial predicament with its busted banks and bent housing sector resulted from a general failure of regulation and supervision (including government ineptitude was well).

The new UK Chancellor of the Exchequer, George Osborne, revealed his revamp of the UK’s financial system last night in a speech in London, with the main point that the Bank of England regains its supremacy and the Financial Services Authority is abolished, but saved inside the central bank.

There is nothing in these changes to apply in Australia. While the UK has moved away from the split structure that it established in 1997 and we followed (with APRA, the RBA, ASIC and Federal Treasury overseeing regulation, prudential control, consumer and monetary policy), the UK is heading away from that and back to a compromised halfway house.

The much criticised FSA (it is blamed for most of the problems, seeing it did have prudential control and also oversaw over the consumer side and all the markets) will be wound down and replaced by three bodies over the next two years. A Prudential Regulatory Authority will be created as a subsidiary of the central bank, as will a Financial Policy Committee and a consumer protection and markets agency will be established from the rump of the FSA.

Seeing the FSA staff (including boss Hector Sants, who wanted to quit but has been talked into staying for three more years), are paid considerably more than the Bank of England staff, you can see the next disaster in the making.

Osborne said in his first Mansion House speech (a major yearly black tie event where the chancellor and the governor of the Bank of England speak to the markets): “At the heart of the crisis was a rapid and unsustainable increase in debt that our macroeconomic and regulatory system utterly failed to identify let alone prevent.” So the answer is to reward the main regulator, the central bank.

And King told the Mansion House dinner that the new framework will assure the stability of the financial system. “A credible macro-prudential regime could help forestall both excessive exuberance and unnecessary caution. By altering the pressure on the financial brakes according to circumstances, regulation, far from being an inflexible foe, would become a flexible friend.”

The Financial Times reported that King told a City audience at Mansion House on Wednesday night that his new role in enforcing financial stability was to “turn down the music when the dancing gets a little too wild”. Well, the last person to mention dancing in connection with finance was the unlamented Chuck Prince at Citigroup in 2007, two weeks before the credit crunch erupted. He soon departed, so let’s hope King isn’t caught fox trotting by a sudden market failure.

But it has to be asked where was he when the sh-t was hitting the fan in 2007 and before as the pressures built up, leverage exploded and the bankers danced and gave themselves billions in bonuses and profits?

He is and was a key regulator and one of the keys to tough regulation is the ability to stand up and say stop, or enough, when no one is listening.

Even though the Bank of England wasn’t the key regulator, King and his fellow members had considerable clout and could (should?) have used it blow the whistle on the problem and alert people, government and others to the approaching problems. The question therefore has to be asked, did he and the bank see the problems emerging, or didn’t they?

In Australia, our regulatory system, led by APRA and the RBA, worked hard to make sure our banks allocated capital to off-balance sheet structure called SIVs, conduits and SPVs where some good and bad assets were held. The banks were forced to hedge their offshore borrowings to protect themselves and if there is a criticism to be levelled, it is as ASIC for sluggish regulation of finance companies (such as Westpoint) and the behaviour of directors in groups such as Babcock and Brown, Allco Financial and ABC Learning, not to mention Opes Prime and Tricom.

But compared to the UK, they were minor problems. Britain lost several banks and building societies to collapse or forced takeover: the Royal Bank of Scotland and HBOS were the biggest casualties and the UK government now controls both banks.

RBS got into trouble with too much dodgy debt and the poorly timed and overpriced joint takeover of ABN Amro, the Dutch bank. The Bank of England could have easily stopped that by voicing its now obvious concerns.

Osborne has also appointed a committee to examine the structure of UK banking and advice on its future shape and direction: size and the breaking up of the likes of RBS, Lloyds/HBOS, Barclays, will be major policy decisions for the future for the government.

A night for shuffling the deckchairs.