Financial Services Bill

Indeed. To be clear, that is why the right hon. Gentleman is misguided in tabling amendment 1, which would remove clause 13. That clause sets out a proper framework for the regulation of short selling and will replace the existing regime, which is based on the market abuse directive—many people thought that directive was inappropriate. The clause will introduce a new framework, which will be part of the Financial Services and Markets Act 2000, to enable the Financial Services Authority to take action in certain cases. That is the right response—a proportionate response to the risk that has been identified. Indeed, when the FSA intervened in September or October to ban short selling for financial institutions, we were supportive. All those activities need to take place within the proper regulatory framework, and in considering different aspects of short selling and the different approaches that one might take to tackle some of the issues around it, we need to think carefully about what is the right cost-benefit analysis. Is there a legitimate reason to allow short selling? If we were to restrict short selling, what would be the consequences? I have already made it clear that one such consequence would be a reduction in the relatively small amount of income that pension funds get from lending their shares. In the aftermath of the temporary measures that the FSA introduced last year, it has produced a discussion document that considers short selling and thinks about the potential implications of the restrictions that could be introduced to make short selling more difficult. Interestingly, two of the measures that it suggests reflect measures proposed by the right hon. Gentleman. The first is a prohibition on naked short selling to ensure that it occurs only when cover is in place. Some proponents of a ban argued that it would reduce settlement failures and limit""the speed and the extent to which a short selling strategy can be executed and thus…act as a brake on more aggressive short selling"." The other side of the argument—the argument made by those in the market—is that a ban on naked short selling""would prevent legitimate behaviour which can provide beneficial market impacts."" For example, a ban on naked short selling""would stop intraday naked short selling"" and trading. It would""significantly impair the ability of market makers to function properly, as it is often a necessary part of their role to short sell to meet client demand for a stock."" There are arguments on both sides, and in the end the FSA discussion paper concluded:""Although a prohibition on naked short selling…would be less far-reaching than a prohibition on short selling generally"," it""would still have net negative impacts."" That conclusion was borne out by the responses to its consultation process. The right hon. Gentleman has also introduced a form of the uptick rule, which has been used in the States: people can sell only in a rising market. That has been a feature of the US regime for some 70 years. Again, it was discussed in the context of regulatory reform here in the UK. Interestingly, the Securities and Exchange Commission concluded that it""should remove price test restrictions because they modestly reduce liquidity and do not appear necessary to prevent manipulation"." It came in for a bit of flak for that—it was before the financial crisis—and some argued that if the SEC had still had its uptick rule, that would have reduced some of the turbulence in the financial markets in the wake of the credit crunch. Having said that, the evidence suggests that those rules provide limited protection against the negative effects of short selling, and the FSA commentary says that at most they act""temporarily to decelerate share price declines."" It goes on to argue about the infrastructure costs required to introduce an uptick rule. It is right to discuss measures that could restrict short selling, but the debate under the auspices of the FSA would suggest that, on balance, the measures proposed by the right hon. Gentleman are detrimental to investors, rather than achieving a net benefit. The extensive work by the FSA would argue for a rejection of new clause 8, but if he is concerned about governance, there are other ways of doing it, and we should not try to restrict short selling through his proposals.