Under an agreement reached last week, the City of London police - responsible for law enforcement in the capital's financial district - will, at the FSA's request, detain individuals suspected of criminal offences.

Although the FSA was given the power to have suspects detained under the 2000 Financial Services and Markets Act, the watchdog has until now made no attempt to exercise it.

The FSA's new hardline approach is designed to make its investigations into cases of fraud and market abuse more effective.

It comes in response to a decline in the number of individuals agreeing to be interviewed voluntarily.

Cracking down

"In the absence of a voluntary interview, we can now have people arrested and questioned under caution," an FSA spokeswoman said.

It is hoped that the threat of arrest will encourage more people who may have been involved in financial crime to speak to the FSA of their own free will.

However, it is expected that the FSA's move to formalise its powers will lead to some arrests in the course of its enquiries.

The City of London Police - which has the largest dedicated fraud squad of any British police force - said it welcomed the new arrangement.

"Financial crime is one of our niche specialities," a spokesman said.

The FSA's crime investigation unit focuses on three main types of financial skulduggery: money laundering, fraud, and criminal market abuse such as insider dealing.