Directors of the fund managers' watchdog, Imro, have been summoned to an emergency board meeting next week to discuss allegations that their chairman gagged his chief executive before a meeting of MPs.
The meeting comes amid signs that the Treasury is prepared to back Phillip Thorpe, Imro's chief executive, in his criticisms of the Securities and Investments Board, the City's senior financial regulator.
Treasury sources said they would not be "absolutely distressed" if the SIB was to be heavily criticised for its ineffective regulation of the financial services industry.
Although the SIB had managed to deal with the personal pension scandal and other crises that had hit the industry in recent years, it was "not exactly ahead of the game", sources said.
News of the board meeting, due to take place on Tuesday or Wednesday, follows a report in yesterday's Independent about deep divisions within Imro.
The meeting will discuss whether Charles Nunneley, the Imro chairman, muzzled Phillip Thorpe at a hearing by the Commons Treasury and Civil Service select committee earlier this week.
Mr Thorpe has said that he was prevented from giving committee members full answers to their questions. It is also believed that he felt he would be sacked for doing so.
Board members will also have to decide whether to believe Mr Nunneley's claims that he was not influenced by a critical letter and a phone call from Andrew Large, chairman of the SIB.
Mr Nunneley has categorically denied that he attempted to gag his chief executive on Mr Large's say-so, or that he threatened him with the sack.
Mr Thorpe yesterday refused to divulge the contents of the letter or say if it contained passages that might be construed as suggesting public criticisms of SIB's role were not welcome.
He said: "I imagine that the board will be looking at the written submission we made to the select committee, looking at what transpired at the committee and considering all the events.
"We will also be discussing how to make the system work. My concern, as it always has been, is that if we are not open about what we are doing, it will not be possible for the public to retain confidence in the system."
Mr Thorpe also rejected suggestions that the board would not have wished him to expand on the subject to the select committee.
"I cannot imagine the Imro board suggesting that I should not answer a question truthfully, honestly and openly."
Robin Hutton, a director of fund manager Singer & Friedlander and an Imro board member, said: "I would be rather surprised if there were a real disagreement between Phillip Thorpe and Charles Nunneley. My view is that I would expect Phillip Thorpe to speak to any party in a manner that he wished, subject to explaining his actions to the board."
The critical showdown between two of the financial services' top regulatory figures comes amid mounting concern over the future of regulation of the financial services industry. The Treasury is believed to be partly influenced by the possibility that, in the event of a Labour government, it could be involved in the setting up a "super-regulator" along US lines.Reuse content