City whistleblowers set for immunity from prosecution

City whistleblowers could be granted immunity from prosecution under Treasury plans to give more powers to the Financial Services Authority (FSA), it emerged last night.

Proposals to boost the "teeth" of the British financial watchdog comes amid claims of market manipulation and after last week's slump in shares at HBOS driven by what the FSA described as "false" rumours about the mortgage lender peddled by a London-based hedge fund.

The FSA has struggled to act against those suspected of wrongdoing in the City and has been lobbying the Government for extra powers such as those enjoyed by its American counterpart.

The Chancellor of the Exchequer, Alistair Darling, has held talks with the US Treasury Secretary, Henry Paulson, and last night said he wanted to give the UK watchdog "the tools to do the job". The model being looked at is similar to that of America's Securities and Exchange Commission.

In the wake of the HBOS slump, in which shares fell by as much as 17 per cent, the FSA said it would "not tolerate" traders starting "false" rumours about firms in order to make money from share dealing.

The FSA welcomed the move. In a statement it said: "There has been a series of completely unfounded rumours about UK financial institutions in the London market over the last few days, sometimes accompanied by short-selling."

The move comes after the FSA was attacked on Wednesday in an audit into the regulation of Northern Rock. It criticised a "lack of sufficient supervisory engagement", a "lack of adequate oversight", "inadequate specific resources" and a "lack of intensity" from the regulator.