Investment banks, law firms and others involved in takeovers should be more careful about who has access to inside information and less complacent about possible leaks, the UK’s chief financial watchdog said today.

The Financial Services Authority did not identify an appropriate number of insiders on any given transaction but said that firms should “generally be applying more vigour in deciding who needed to know about a deal.”

It added that the “number of insiders at many firms was significant” with “almost 200 at one firm on one deal.” In Barclays £47 billion bid for ABN Amro, there are 22 banks and law firms working on the deal, leaving out accountants, public relations firms and other such advisers and advisors for Royal Bank of Scotland's rival bid consortium.

The FSA, detailing the results of a six month insider trading probe, slammed firms for refusing to acknowledge that they could be responsible for information leaks.

"All of the firms we spoke to were confident that leaks of information relating to public takeovers did not originate from within their firm. Given the firms with whom we spoke included some of those who are the most active in UK public takeover deals, and given the observed price volatility on a proportion of such deals, it seems reasonable to conclude that parties were perhaps too complacent that their own internal procedures were already robust."

Last year the FSA admitted that its data showed suspicious trading activity on almost one third of UK takeovers in 2005, the most recent year its researchers have studied. The revelation sparked fears that insider trading - where people use advanced knowledge of upcoming takeovers to buy and sell shares before the rest of the market is informed - was widespread throughout the City of London.

The FSA admitted the levels of suspicious trading activity, which strongly suggest but do not prove insider dealing, were unacceptable and launched its review.

Commenting on today's findings, Sally Dewar, FSA director of markets, said the FSA had "identified a number of areas where firms could improve their handling of inside information to help reduce the level of leakage."

"All firms who handle inside information relating to takeovers should review the robustness of their own controls..and make any necessary improvements," she added.

The regulator also called on firms to improve their IT security, claiming that at many companies non-approved individuals could access sensitive information because of IT weaknesses.

In response to the widespread complacency among FSA-regulated firms about potential information leaks, the regulator called for firms to implement formal policies that would allow senior staff to investigate whether information had leaked.

It added that it was working on a statement of practice for non-regulated firms, such as law firms, accountants and PR advisers, which are beyond the FSA's remit but play a crucial role in takeovers.

This morning's review did not contain any updated information on suspicious trading in UK markets.

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