'It will surprise people.' FSA gets to heart of HBOS share scandal

Financial Services Authority chiefs are believed to have found the "smoking gun" in the recent share-shorting incident that caused the value of HBOS to slump by a fifth in one day.

The regulator is set to go public on its findings by the end of the month, with a source close to the body saying: "It's now known what happened. It will surprise people what's been found."

The FSA is believed to have pulled more than a day's worth of emails sent by City dealers on the Bloomberg trading platform, when rumours sent the shares into a tailspin on 19 March.

Meanwhile, the regulator's clampdown on insider trading will be demonstrated when a second criminal prosecution is launched before the summer, after one earlier in the year over insider dealing linked to shares in Motorola.

The FSA recently revealed that it had doubled its roster of criminal prosecutors for pursuing insider dealing cases, following last year's introduction of a computer system called Sabre, which attempts to identify abnormal share-trading patterns.

The FSA is also set to publish new guidelines for mergers and acquisitions, with a so-called "principles of good execution" likely to be issued in early June.

Last year the regulator investigated a number of high-profile deals, including the purchase of Associated British Ports by a private equity consortium led by Goldman Sachs.

City public relations firms were visited in an attempt to curb leaks of potentially price- sensitive information.

Last week outgoing FSA chairman Sir Callum McCarthy admitted concerns to the influential Treasury Select Committee that firms in the Square Mile were in effect turning a blind eye to abuses. Asked whether City companies took the issue seriously, he said: "I would say no."

Sir Callum asked for a speeding up of the legislative process that would enable the regulator to engage in American-style plea bargaining, which many believe would increase the number of successful prosecutions brought relating to market abuse.

"This is something we have decided to push up our list of priorities," said Sir Callum. "We started doing that about three years ago. We are now very clearly asking the Government for further powers."

Meanwhile, it is believed that the FSA is close to finalising a replacement for Sir Callum, who leaves in September.

An announcement is expected within the next month.