Gangs of organised criminals may be infiltrating the mergers and acquisitions departments of British investment banks to garner inside information on takeover bids, the City watchdog suggested yesterday.

The Financial Services Authority accused banks of being “complacent” about the risks that their own staff might be guilty of illegally exploiting secret bid information.

Banks and other advisers needed to do more to investigate the source of leaks and should do more to reduce the huge numbers of people with access to price-sensitive information, the FSA said.

It criticised banks and other advisers for failing to monitor and control personal dealings in shares and derivatives by their staff. Weaknesses in controls on information technology and lack of staff training were also raised as problem areas.

The suggestion of mafia-style infiltration came in the latest review from the FSA’s markets division, headed by Sally Dewar. Last year it began an investigation because there was evidence of insider dealing before 25 per cent of all bids for UK companies.

Urging firms to put in place firm policies, the FSA said that staff needed to be aware “of the risk that inside information is valuable and organised criminals may place insiders at firms with the aim of accessing and disclosing information”.

John Tiner, the outgoing chief executive of the FSA, called on the Government to grant the FSA formal powers to offer witnesses immunity from prosecution.

He used his farewell speech to City leaders to push the case for American-style plea bargaining in cases of insider dealing, arguing that successful prosecutions were very difficult. “To help the FSA to build a strong case, we would like to be granted formal powers to offer immunity in exchange for hard evidence and I would urge the Government to accede to this request,” Mr Tiner said.

Market abuse could be very sophisticated, using derivatives, and the reliance by prosecutors on circumstantial evidence could seriously weaken a case, he said. He urged companies to limit the number of advisers on potential deals, saying that he had seen an “insider list” with 1,500 people on it.

One of the most notorious insider dealing rings of recent years was led by a compliance officer within Credit Suisse First Boston (CSFB). Asif Butt was jailed for five years after using price-sensitive information picked up at CSFB to make spread bets. He and his four co-conspirators – former school friends who also received jail sentences – made profits of £265,000 from tips about 19 companies, including Royal Bank of Scotland and EMI, between 1998 and 2002.

The FSA urged investment banks, law firms, PR consultants, financial printers and others advising on bids to do more to investigate the source of leaks. Because so many people are involved in takeovers, each firm tends to assume another firm is at fault. Advisory firms argue that in-house postmortem examinations after leaks are time-consuming, usually inconclusive and can damage the firm’s reputation if they become known. However, the FSA argues that firms should be much more alert to possible leaks from their own staff. They were too willing to add official insiders to those permitted to see inside information.

IT controls could be improved: most bid-related e-mails were sent without password protection and there was a risk of “fat finger” errors, or messages sent to the wrong address. On training weaknesses, the FSA said that while professional staff might be well-versed in market abuse rules, nonprofessional and support staff sometimes were not.

It said that there was a wide range of practices on staff buying and selling shares on their own account, a practice known as PA or personal account. Some firms ban PA dealing.

The FSA plans to hold discussions with City banks and other bid advisers on how they should investigate leaks and how they could restrict numbers given access to inside information.

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