Sants's departure followed a Sunday Herald exclusive in which influential Conservative Treasury Select Committee member Michael Fallon MP expressed "deep reservations" about the former banker's fitness to assume the lead role in the FSA's successor body, the Prudential Regulatory Authority.
"The performance of the FSA under Sants has been shocking," said Steel, chairman of investment advisory firm, Alan Steel Asset Management.
"His handling of the banking crisis has been all about protecting his own. As chairman, Turner should also consider his position.
"I don't believe the head of a regulator should ever come from inside the industry again. When they do, it invariably ends badly for the public."
Steel added that Sants's departing annual pay package of £807,000 was "scandalous when you consider how little he has achieved".
Sants joined the FSA from the investment bank Credit Suisse as managing director of wholesale in May 2004 and became FSA chief executive in July 2007. Much of the UK's banking sector, including Royal Bank of Scotland and HBOS, crashed and burned on his watch, though he has been credited with spearheading some vital reforms since the crisis.
City analysts have noted that Sants's departure precedes public airing of the FSA's pre-crash actions and non-actions, expected to feature in a forthcoming criminal action against former HBOS executives and an expected £3 billion High Court case against Fred Goodwin and RBS.
Rowan Bosworth-Davies, a leading financial crime consultant and former Scotland Yard detective, said: "Sants is a professional private banker and has the mindset of such a person. He didn't see or appreciate what was going wrong because culturally he is predisposed to 'not seeing'.
"Sants is exactly what is wrong with the City and its style of regulation. The British have always believed that the Great and the Good, operating on the cult of the enthusiastic amateur, can police wrong-doing in the City, whereas it needs someone who is familiar with the ways of criminals.
"The FSA is staffed by a lot of people with fancy titles who like to meet and greet with other regulators around the globe, but none of whom have ever even investigated a shoplifter.
"How can they be expected to bring any real sense of criminogenic insights to the role when they themselves come out of the same class and background as those they supervise?"
Peter de Vink, managing director of investment firm Edinburgh Financial & General Holdings, said: "The FSA have not exactly covered themselves in glory. At least Hector Sants has had the decency to fall on his sword. The question now is whether the chairman, Lord Turner, will follow his lead."
Sants, 56, will formally stand down in June and will not be replaced. Some of his duties will be taken on by Lord Turner, who became chairman in 2008. Andrew Bailey, a Bank of England executive director, will continue as deputy head of the FSA's prudential business unit, and is a candidate to become chief executive of the PRA. The PRA will be a subsidiary of the Bank of England.
Martin Wheatley, a former Hong Kong regulator, is to continue as head of the FSA's conduct business unit, and is due to become boss of sister body the Financial Conduct Authority when it is launched in 2013.