The City watchdog willreplace its current database, the Surveillance and Automated Business Reporting Engine (Sabre), with a more powerful database that analyses the financial markets and automatically alerts regulators to trans-actions that may break market rules.
The cost of the new system, which should be in place by 2006, will be partly met by increasing fees for organisations regulated by the FSA.
The FSA's current system can monitor both trades and individual firms, but is not able to alert regulators when suspicious transactions, such as trading ahead of price-sensitive announcements, occur.
"Sabre is a simple database and we use a number of pre-determined and flexible reports to extract information from the system," the FSA said. "[Sabre] relies on the judgement of the analyst to know what information is required and does not provide alerts to speed up the review process."
Daniel Lessner, associate analyst in financial services technology at Datamonitor, said, "Regulators are increasingly starting to use more sophisticated technology for fraud detection," said . "This is definitely one of the biggest tests yet for this kind of technology."
The FSA investment mirrors that of financial services firms, which are spending more in fraud detection software in response to more stringent anti-money laundering regulations in Europe and the US. Last month high street bank Abbey was fined £m by the FSA for failing to meet regulations to tackle money laundering.
The system is likely to use neural networking technology to scan the markets for suspicious transactions and workflow technology to help regulators keep track of transactions that need to be investigated, said Lessner
The FSA also plans to replace its modem-based service for receiving transaction reports from companies with a direct electronic link, probably using XML technology. Currently, firms send reports to the FSA using a variety of electronic systems that have not been designed to meet FSA data requirements.
Further details of the reporting system will be announced in March, with development scheduled to take about 12 months.
Read more on IT risk management
ABN Amro investigation lends weight to anti-money laundering collaboration by Dutch banks
Dutch banks to work together in fight against money laundering
Danske Bank invests in anti-money laundering systems following Estonian problems
Nordic finance watchdogs losing patience over anti-money laundering systems at banks