Short-selling ban dropped

The Financial Services Authority (FSA) is to drop its ban on short-selling on financial stocks.

The ban on betting on the falling share price of financial stocks was brought in at the height of the credit crisis in September, when short-selling was blamed for pushing down the share prices of a number of banks and undermining confidence in them.

However, the regulator warned the ban could be reintroduced at short notice if needs be.

The FSA is also extending its temporary disclosure of significant net short positions in the stocks of UK financial sector companies until 30 June 2009 – meaning investors short-selling will have to continue to making their positions public.

Sally Dewar, FSA managing director of wholesale and institutional markets, said: "We believe that these proposals are the right measures for maintaining orderly markets.

"Continuing the disclosure obligations as we propose will reduce the potential for abusive behaviour and disorderly markets.

"In addition, we will not hesitate to reinstate the ban if necessary."

Short-selling involves the borrowing and sale of an asset in the belief that its share price will fall.

The assets, whether shares, currency or contracts, can then re-acquired at a lower price and returned to an investor, with the trader keeping the difference.

A total of 34 firms are covered by the FSA rules on short-selling – including Aviva, Barclays, HBOS, Friends Provident, Prudential, RBS and Lloyds TSB.

Liberal Democrat shadow chancellor, Vince Cable, described the lifting of the ban as "a very worrying development".

"The FSA doesn't seem to have grasped the central point that banks are different from other companies because they involve systemic risk," he said.

"If short selling results in a wave of panic such that banks go down then the practical consequence is that taxpayers will have to assume responsibility.

"Short selling in most markets has a valid role providing there is effective action by the regulator to deal with market abuse when false rumours are being deliberately circulated. British authorities, unlike the Americans, have been very weak in this area."