Peter Bryan was released from secure hospitals to kill again and again.
Officers labelled Bryan "the cannibal" after they found him frying some of Brian Cherry's organs.
The mental patient, who suffered paranoid schizophrenia and a personality disorder, told police after his arrest: "I would have done someone else if you hadn't come along. I wanted their souls."
After walking out of a mental health unit in Newham, east London, Bryan had gone to visit his friend Brian Cherry - there he cut him up with a Stanley knife.
Mr Cherry's niece Emma, 20, of Falkirk, Stirlingshire, said: "I just can't believe anyone could do this to Brian.
"He was my favourite uncle and a totally kind and gentle man. He would never have hurt a flea.
"It's like something out of a horror film.
Bryan was a convicted killer who had beaten 20-year-old shop assistant Nisha Sheth to death with a hammer as she worked in her family's clothes shop in Chelsea, south-west London, in 1993.
He was sent to Rampton secure hospital in 1994 but was freed in 2001 after applying to a health review tribunal.
The Home Office is thought to have objected but was overruled and Bryan was released into the care of a psychiatric social worker and psychiatrist.
After a spell in a local east London hospital, he was allowed to live as a care in the community out-patient.
But his health deteriorated and he went to Topaz ward a week before the killing.
As a voluntary patient, Bryan was allowed to leave the locked ward after being there a few days.
After appearing in court for Mr Cherry's killing, Bryan was remanded to Broadmoor special hospital.
But in April last year, he attacked fellow patient Richard Loudwell, 59, formerly of Gillingham, Kent.
Nisha Sheth's parents have criticised authorities for letting Bryan out of a secure hospital.
Mrs Rashmi said: "It is terrible. He shouldn't be out. He shouldn't even be alive. We are paying taxes to keep him alive.
"This brings back all the memories. It reopens the whole story and we are a family who are just trying to get on with our lives."
A review by the East London and The City Mental Health NHS Trust in the immediate aftermath of Mr Cherry's death resulted in the trust "enhancing its specialist community-based forensic teams to strengthen local mental health services".
It has also launched an inquiry which will be conducted by three independent panels.
Sheila Foley, chief executive of the trust, said: "I would like to extend my deepest sympathy to the family and friends of Mr Cherry and all those affected by this case.
"The issues raised in this highly unusual case will be the subject of an independent inquiry but I would like to give my personal assurance that the trust is doing and will continue to do everything in its power to improve the services we provide to local people."