An independent authority which would "vigorously police" the financial services sector could be in place by the end of next year, Government sources said last night.

A memorandum seeking a decision in principle and on the broad scope of the new body is to be brought to the Cabinet shortly by the Tanaiste, Ms Harney, and the Minister for Finance, Mr McCreevy.

The intention to bring the joint memorandum to Government was disclosed yesterday by Ms Harney when she responded to the latest revelations concerning Allied Irish Banks' tax payments in respect of bogus non-resident accounts.

If the proposal is approved, a consultation approach will begin immediately with the intention of having legislation passed and the new body in place by the end of next year. It is likely that all consumer protection functions currently handled by the Central Bank would be transferred to the new body.

Regulatory and supervisory functions currently carried out by the Department of Enterprise, Trade and Employment, the Director of Consumer Affairs and the Irish Brokers' Association are also likely to be transferred to the new body.

The authority would then act as regulator in relation to the banks, the insurance sector, investment and insurance intermediaries and mortgage brokers.

The authority would "set standards for the industry and be in a position to police them vigorously", said one source. "The idea is very much to protect the interests of the consumer."

The Central Bank is seen to concentrate heavily on currency and solvency issues and not to have been sufficiently active in the interests of the consumer. "The idea is to establish a modern regulatory regime that is pro consumer and up to the best international standards."

Ms Harney is said to be furious with the ongoing series of scandals and is determined that a body with the power to enforce standards in the sector should be put in place.

In July the Oireachtas Joint Committee on Finance and the Public Service recommended that an independent financial services authority be created to supervise all financial institutions.

The committee produced a report in which it stated that no body or agency seemed to be in existence to ensure banks and other financial institutions were properly supervised.

The report was drafted after hearings held in the wake of the revelations concerning National Irish Bank. Appearing before the committee during its deliberations were: the chairman of the Revenue Commissioners at the time, Mr Cathal Mac Domhnaill; the governor of the Central Bank, Mr Maurice O'Connell; the Secretary-General of the Department of Finance, Mr Patrick Mullarky; and the Director of Consumer Affairs, Mr William Fagan.

The committee recommended that the authority should have the power to recommend the revoking of licences and the dismissal of individual managers "in cases where prima facie evidence of malpractice is found".

The report also found that the Revenue Commissioners, while having wide ranging powers, "is not entitled in law to obtain all relevant information about individuals and organisations, which would enable its officers to make a comprehensive assessment of tax liabilities".

Yesterday, Ms Harney said a Government tax advisory group was examining whether it was necessary to give the Revenue new powers to allow it to "trawl" through bank accounts.

At present the Revenue must go to the courts to seek permission if it wants to see a named person's account in a particular bank branch.