FSA may face legal action over short selling ban

by Gill Montia

Story link: FSA may face legal action over short selling ban

The Financial Services Authority (FSA) could face legal action over its decision to ban short selling of financial stocks.

The ban came into place on Thursday of last week, affecting over 30 financial institutions.

Those involved in the practice sell stock which they do not own in the expectation that the price of the stock will fall, allowing the trader to buy the shares back at a lower price and pocket the difference between the initial selling price and the subsequent purchase price.

The ban, which has been applied until January of next year, will impact heavily on hedge funds and The Telegraph and Mail on Sunday have reported that some leading funds are proposing to claim compensation.

According to reports, the hedge funds are asserting that the FSA has extended its powers in a move that could cost some funds millions of pounds.

Short sellers are also pointing out that they are being blamed for the failures of banks that have lent irresponsibly and also the failures of regulators.

While short selling is regarded by regulators as a legitimate investment technique, it was blamed for the downward spiral in HBOS’s share price at the beginning of last week.

Regulators in the US are also investigating short selling and its links to the struggles of investment banks, Goldman Sachs and Morgan Stanley.