When the Financial Services Authority (FSA) said last week that it was launching an investigation to catch the market manipulators behind the spectacular bear raid on HBOS shares, the response from regulatory lawyers was a near-unanimous and sceptical “Oh yeah?”.

The chances of the FSA identifying the shadowy figures responsible for spreading malicious rumours about the Halifax and Bank of Scotland banking group was seen as negligible. The chances of successfully proving guilt beyond reasonable doubt was seen as little better than nil.

However, the announcement by Alistair Darling on Thursday that he was to allow the FSA to offer immunity from prosecution to witnesses prepared to grass on others responsible for market abuse is seen as a significant new weapon for City regulators.

For at least 18 months, the FSA has been lobbying the Treasury for these powers — until recently with no success. However, the threat that bear raiders could destabilise a big financial institution such as HBOS appears to have changed minds in Whitehall.

The Chancellor said: “I can't allow us to get into a situation where people quite deliberately manipulate markets for personal gain and with the potential to destabilise the financial system. We have a duty to ensure we have clean and efficient markets.”

Under the Treasury proposals, the FSA will be given “specified prosecutor status”, which will allow it in certain circumstances to offer US-style immunity from prosecution to key witnesses. The Serious Fraud Office (SFO) and HM Revenue & Customs (HMRC) already have these powers.

The FSA seized on the news enthusiastically yesterday, saying that the new powers would be a useful tool in its work to tackle market abuse. Its enforcement division, under Margaret Cole, a tough lawyer previously with the American law firm White & Case, has grown frustrated over the difficulty securing evidence sufficient to stand up in court.

In 2006 Ms Cole admitted that the FSA's success rate in convicting market abusers was “sparse” and praised the US system as “a valuable tool” for obtaining convictions. Offering plea-bargaining concessions needed to be weighed carefully, but she did not share the distaste of some in Britain for the practice.

With this week's Treasury U-turn, she has got her wish. Most regulatory lawyers agree that it should help to win convictions. Robert Turner, a partner in Simmons & Simmons, said: “I think this will probably help in securing convictions against bad apples, so long as it is done responsibly. When the FSA is investigating what it believes may be an insider-dealing ring, these extra powers may be the difference that allows them a way in.”

Much market abuse involves more than one person. The classic insider-dealing operation involves one person privy to price-sensitive information and an accomplice who trades on it. So long as the two rogues insist that there has been no communication between them, proving an offence is next to impossible. Offering immunity to one or the other destroys the incentive that both have to stay silent and protect each other. Indeed, the risk that one may crack pushes both to rush to do a deal with prosecutors.

The same principal applies to the most high-level insider-dealing rings that the FSA suspects exist in the City. It takes only one person in the ring to cave in. The FSA is hoping that the new powers will flush out City supergrasses or at least pose so great a risk of being caught that insider-dealing rings disband.

Immunity from prosecution is not new in Britain. Under common law, prosecuting authorities have been able to offer witnesses deals, but the practice has been rare and sometimes frowned upon. It was the Serious and Organised Crime and Police Act of 2005 that enshrined the practice in statute and made it more widespread. The SFO has used these powers several times and is understood to have adopted them in Operation Holbein, the investigation into an alleged cartel that disadvantaged the NHS. []HMRC is understood to have used the powers to win over a Canadian witness in a narcotics case.

Primary legislation is still required to add the FSA to the list of bodies having the powers, the Treasury said.

However, the extra powers need to be handled carefully. “One drawback is that you do a deal with rogues who walk away free,” Mr Turner said. “Another risk is that the FSA does the deal with a principal culprit looking to lay the blame elsewhere, leaving the FSA prosecuting lesser culprits — so it's a power that will have to be used responsibly.”

Roger Best, of the law firm Clifford Chance, said that the FSA would have to be seen to act fairly. Other prosecutors, such as the Crown Prosecution Service, reserved immunity deals for exceptional cases with a strong public interest factor. Moreover, the reliability of a witness on a promise of immunity might not be of the highest quality, Mr Best said.

However, with latest figures suggesting that insider dealing takes place before a third of bid announcements and with the HBOS saga putting abuse back on to the front pages, the FSA will be grateful for any break it gets in the difficult business of nailing clever, deep-pocketed, white-collar rogues.

Breaking cover

Sherron Watkins is the Enron whistleblower. In 2001 she sent an anonymous memo to her boss, which said: “I am incredibly nervous that we will implode in a wave of accounting scandals.” She joined in 1993 and reached vice-president level, although she was never a part of the inner circle that ran the group. In July 2001 she became nervous of the accounting methods it practised. She testified before Congress and was one of Time magazine's three People of the Year in 2002.

David Donnelly worked in Severn Trent's finance department. In 2004 he contacted a newspaper with concerns about a cover-up at the water company, which was completing a five-year review of its finances with Ofwat, the regulator. By mis-stating figures, Severn could charge customers more. The company, which has changed its management team, now faces a criminal prosecution and multimillion-pound fines. Mr Donnelly, 52, retired early with a lump sum in recognition of Severn Trent's mishandling of his original complaint.

Basil Brookes, finance director of Maxwell Communications Corporation (MCC), was one of the first to blow the whistle on Robert Maxwell's chicanery. He tried to quit in July 1991, but was persuaded to stay despite his concerns at the cash that Maxwell was demanding from MCC. He was one of the directors who forced Maxwell to return part of the £240 million that vanished from MCC's treasury. Terrified at the implications of Maxwell's actions, he resigned on October 31, 1991, and worried for years that his career had been damaged by his links with the newspaper magnate. He became finance director of Wilmington Publishing, a business magazine group bought by Brian Gilbert, another former Maxwell executive.

David Radler was the right-hand man to Lord Black of Crossharbour, the fallen press baron. He negotiated a plea bargain for testifying against his former friend and boss. Radler, 65, received a more lenient sentence of 29 months and a $250,000 fine in exchange for testifying against Black and three other executives in a four-month trial last year involving deals made by the former Hollinger empire. Black and his lawyers fiercely attacked Radler for choosing to testify and accused him of lying about Black's role to secure his deal with prosecutors. Black dismissed his testimony, saying outside of court: “I don't think any jury in the world would convict anybody on the basis of what he said. This was never a criminal case, except possibly against him.”

Mike Newell, ex-manager of Luton Town football club and a former Everton forward, kicked off a fresh investigation into bungs in football in January 2006 when he said that agents had offered him cuts of transfer deals. Days later he was summoned to the FA's Soho Square HQ, where he alleged that a bung culture was pervasive in the game. His remarks prompted a Panorama investigation and kicked off the Stevens inquiry, which resulted last November in the FA laying 55 charges against eight agents, four past and present directors and Luton. Newell was sacked by his club for gross misconduct and has not worked since.

Dr Jeffrey Wigand exposed the activities of the tobacco business in 1995. He had worked in research and development at Brown & Williamson, the American cigarette maker owned by BAT. On the 60 Minutes television show he revealed how tobacco companies had tried to minimise the harmful impact of smoking when marketing their products. His evidence helped to bring multimillion-dollar lawsuits against the big American tobacco corporations. He was portrayed by Russell Crowe in the 1999 film The Insider.

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