The FDA would still exist, and would still have a job to do. You wouldn't be able to just sell literal poison in the supermarket alongside the oatmeal. The FDA currently classes items approved for sale into a broad number of categories: food supplements, medicines, etc., but there is nothing there for recreational psychoactive substances and there would probably need to be. The difference between that and the current regime I imagine would be that the focus is on the purity and relative safety of the product rather than 'does this have any medical use' because often it simply doesn't. And as a result of this some things would still be illegal, but it would be more about selling heroin that is only 20% actual heroin and the rest is who knows what, or selling something as marijuana when it's actually low-quality shit laced with PCP or whatever. Banning an entire class of a substance would be a rare thing, I imagine.

As to your second point, I think it's more likely that existing cartels would, in trying to transition to legal enterprise, find that running an actual business takes a set of skills that your typical pack of thugs just doesn't have, and you'd see some retaliation against legitimate suppliers who are kicking their ass on price and consistency. But unlike now where it's law enforcement taking on organized criminals with a shitload of money, they're taking on a husk of an organization that has seen its primary source of funding evaporate almost overnight. Different set of rules, there.

Honestly though I don't know what the cartels would do. It's hard to say. But one thing they wouldn't be doing is spending billions terrorizing innocent people, because they wouldn't have that kind of coin, anymore.