UK eyes jail sentences to battle insider dealing

Britain's financial watchdog plans to use jail sentences and tougher fines to crack down on insider dealing, after data showed possible insider trade before over a quarter of takeovers last year, unimproved from 2006.

Critics have long accused Britain's Financial Services Authority of failing to flex its muscles, comparing it unfavourably with the U.S. handcuffs-and-jail approach.

Data published on Tuesday showed "informed price movements" - which indicate possible market abuse - before 28.7 percent percent of takeover announcements last year, after 28.6 percent in 2006 and 23.7 percent in 2005.

Though so-called "informed price movements" are not necessarily a proxy for insider dealing levels, they do indicate abnormal trade, prompted either by correct guesses by media and analysts, by a deliberate strategic leak or by actual insider trading. Insider deals can also take place without turning up on the FSA radar as informed trades.

"We consider that the level of (informed trades) for takeovers is too high and is not reducing as we would wish," the FSA said in a newsletter.

The watchdog is working to improve controls within firms, including recording phone calls, messages and imposing two-week trader vacations, but it said on Tuesday it would also beef up its enforcement to deter possible rogue traders.

The move is a sharp shift for the FSA, which has long focused its "principles-based" approach to regulation on working with firms to prevent market abuse and insider dealing, shunning a confrontational approach.

It said it would use both the civil and the criminal route to prosecute wrongdoing, after long focusing on the civil above the criminal courts, largely due to the additional difficulty in obtaining criminal convictions.

"So, while the civil route will continue to be used, we are now in recognition of the significant deterrent effect of custodial sentences, making more use of the criminal options available to us in appropriate cases," the watchdog said.

The FSA said it had strengthened its in-house criminal investigation and prosecution skills and had begun a criminal insider-dealing prosecution, its first since it took over responsibility for initiating prosecutions in 2001.

It will also increase financial penalties in cases pursued through the civil route.

Last month, as part of efforts to strengthen the FSA in nervous markets, finance minister Alistair Darling said it would be given new powers including the ability to grant whistleblowers immunity from prosecution in return for evidence.

Regulators said then that this would help track down the "smoking gun" crucial to cases where evidence is often little more than circumstantial.

The FSA is currently investigating market rumours last month that prompted a sharp drop in UK bank shares led by lender HBOS , in a process known as "trash and cash". As part of its probe, the FSA said it was reviewing firms' policies on rumours.