The marketing director, Christine Tulloch, admitted the decision to shut down the London arm was influenced by last month's unexpected departure of the joint creative directors, Tony Malcolm and Guy Moore, who moved to Wieden & Kennedy.
The Scottish agency will reconsolidate business in its original Edinburgh base.
The remaining London-based team of the managing partner, Graham Deakin, and the planning director, Anna Hutson, will be leaving.
Faulds' main London client is British Bakeries, for which it handled the Mother's Pride and Nimble brands. It lost the £4 million creative account for the car repair company Kwik-Fit in April.
"We knew we were taking a risk when we opened the London shop," Tulloch said. "We thought that things would start getting better by 2003, but that hasn't happened. Losing the Kwik-Fit business hasn't helped and we couldn't keep pumping money into London."
Faulds will continue to work with the London-based PR company Consolidated and the design agency Unreal, with which it has forged strong links.
The Scottish shop is also looking to recruit a creative director and account manager for its Edinburgh office.
The Faulds chairman, Dennis Chester, said it had been a tough year for agencies in the UK: "Given the current economic climate, we believe it's a prudent, commercial move to consolidate our operations in Edinburgh."