Ban on short-selling of UK bank shares lifted

The Financial Services Authority (FSA) in the UK announced earlier this month that it would lift the restriction, despite fears it could result in further downward pressure on shares on the 34-strong ban list.

MPs including John McFall, chairman of the Treasury Select Committee, called for the ban to be maintained, given the problems in the stock market and as bank shares continued to slide.

The FSA said it would reinstate the ban if it saw fit and also said it would keep rules requiring the disclosure of significant "short" positions for an extra six months, until June 30, in an effort to help troubled stock markets.

Short-selling is when investors, typically hedge funds, borrow shares in a company which they then sell in the hope of buying them back later at a lower price.

The FSA introduced a temporary ban on the practice for 34 financial stocks last September due to the financial turmoil in the markets.

When the ban was introduced, FSA chief executive Hector Sants said that while short-selling was a legitimate investment technique in normal market conditions, the "current extreme circumstances" had given rise to "disorderly markets".

Short-selling was also blamed for steep falls in HBOS shares and trading in the stock was subject to an FSA investigation last year, although the regulator found no evidence that rumours were spread about the bank in a bid to manipulate its share price.

There are also mixed views of the effectiveness of the ban. While MPs were vocal in calling for it to be extended, the London Stock Exchange (LSE) said it had conducted its own research that showed the ban actually "impaired liquidity and market quality" of those stocks on the list.

However, the FSA appears committed to the short-selling disclosure rules and it is also reportedly considering extending the rules to all 3,489 companies publicly traded in the UK.