The rules governing short selling practices are a key target of Jeremy Hunt's overhaul. Credit: James Manning/PA Wire
Jeremy Hunt is facing growing regulatory resistance over plans to cut the city's red tape, undermining Tory hopes for a post-Brexit Big Bang 2.0.
Financial Conduct Authority (FCA) officials have opposed loosening short selling rules despite the chancellor's promise to loosen rules as a key part of his Edinburgh reforms, according to the Telegraph.
The regulator opposes any significant relaxation of EU-era rules. . At recent roundtables with city stakeholders, FCA officials indicated they wanted to retain key parts of the current rulebook, several attendees said.
The officials argued that the Brussels-era regime allows the regulator to get a better picture of what is happening in the financial markets and helps it become more «data-driven».
The regulator's reluctance to revise the rulebook could lead to it being at odds with The Ministry of Finance, which made it clear that it intends to relax the rules in this area.
One of the sources at the meeting said: “We are seeing a split. The FCA is keen to keep many of these rules in place, while the Treasury wants to present the current set of rules as an overreach of the EU and aims to cut red tape.
“While we haven’t seen any policy proposals yet, we have seen the direction side of the government that the FCA seems to be aiming to throw cold water on.”
Another person involved in the talks said: “If you compare the FCA to the Treasury, there is more hesitation on the part of the regulator about reforming these rules '.
Any discrepancy in revising short selling rules could set the stage for a new row between the government and financial regulators, who have clashed several times over the past year.
Differences in views on reforms create the basis for a new confrontation between Treasury officials and FCA head Nikhil Rati. Photo: Holly Adams/Bloomberg
In November, Prime Minister Rishi Sunak and Mr Hunt abandoned plans to give ministers the power to overrule the city's watchdogs in an unfortunate downgrade following a rare public backlash from the FCA and the Bank of England.
In December, as As part of the Edinburgh Reforms to accelerate the Square Mile, Mr Hunt vowed to «remove any unnecessary burden arising from EU regulation» after the Brussels Short Selling Rules were incorporated into the UK's post-Brexit code.
Short selling is when traders borrow stocks they think will fall in price, sell them, and then wait for the price to fall before buying them back. The trader then pockets the difference. This is a strategy commonly used by hedge funds.
The practice has faced criticism from some segments of the city's population, with executives such as THG's Matthew Molding blaming the stock's poor performance on «aggressive» short attacks .
Questions have also been raised about the proximity of hedge fund managers to Liz Truss's government, which made millions shorting the pound after her ill-fated mini-budget.
Later last year, the Treasury initiated an «evidence call» for reform of the Short Selling Rulebook, seeking the opinion of market participants on how to adapt the rules to best fit the UK markets. The consultations ended last month.
Industry views on reforming the rulebook vary widely, with some stakeholders calling for minimal changes to their proposals, while others are proposing more sweeping reforms.
The Treasury has requested an opinion on changes to: reporting requirements; rules for public disclosure of information; emergency intervention powers; and an exception for market makers.
During the pandemic, the threshold above which traders are forced to report short positions to the regulator was lowered from 0.2% to 0.1% of the issued share capital of a listed company.
This means that a seller taking a short position in a £500m company would only have to spend £500,000 to enforce the disclosure rules.
I see, that the FCA wants to keep the threshold at 0.1%, while market participants, including UK Finance and the Investment Association, want it raised after a significant increase in the burden of compliance and reporting.
One person participated. stated at the round tables: «The FCA has made it clear that it is not interested in changing the private reporting threshold of regulators back to the previous level.»
The regulator also wants to maintain its emergency intervention powers, which would allow it prohibit short selling during periods of volatility, which several trade associations oppose.
The FCA has not exercised this power since the 2008 financial crisis.
A Treasury source said: “HMT is still committed to reform. We are keen to understand the current functioning of the regulation and how it can be adapted to the UK markets now that we are outside the EU.
“We are still studying the responses to the consultation, so it is difficult to say where we will end up in this moment.»
An FCA spokesman said: «We support the government's approach to seeking input on whether to reform the short selling regime in the UK.»
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