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In November, prime minister Rishi Sunak and Mr Hunt abandoned plans to give ministers the power to overrule City watchdogs in an embarrassing climbdown following a rare public backlash from the FCA and the Bank of England.
In December, as part of the “Edinburgh Reforms” aimed at turbocharging the Square Mile, Mr Hunt pledged to “remove any unnecessary burdens which result from the EU regulation” after Brussels’ short selling rules were brought onto the UK statute book after Brexit.
Short selling is when traders borrow shares they believe will fall in price, selling them, and then waiting for the price to drop before buying it back. The trader then pockets the difference. It is a strategy commonly deployed by hedge funds.
The practice has faced criticism from certain pockets of the City, with executives such as THG’s Matthew Moulding blaming poor share price performance on “aggressive” short attacks.
Questions were also raised about the proximity of hedge fund managers to Liz Truss’ government, who netted millions from shorting the pound following her ill-fated mini-Budget.
The Treasury launched a “call for evidence” on reforming the short selling rulebook late last year, seeking views from market participants on how to tailor the rules to best suit UK markets. The consultation closed last month.
Industry views on reforming the rulebook vary significantly, with some stakeholders calling for minimal changes in their submissions, while others are proposing more radical reforms.
The Treasury has asked for views on changes to: reporting requirements; public disclosure rules; emergency intervention powers; and an exemption for market makers.
During the pandemic, the threshold above which traders are forced to report short positions to the regulator was lowered from 0.2pc to 0.1pc of issued share capital of a listed company.
It means a short-seller taking a position on a company worth £500m would have to spend just £500,000 to trigger disclosure rules.
It is understood that the FCA wants to maintain the threshold at 0.1pc, while market participants, including UK Finance and the Investment Association, want it raised following a significant increase in compliance and reporting burdens.
One person involved in the roundtable meetings said: “The FCA signalled it was not interested in changing the private regulatory reporting threshold back to where it was.”
The regulator also wants to keep its emergency intervention powers that would allow it to ban short selling during periods of volatility, which is opposed by several trade associations.
The FCA has not used those powers since the 2008 financial crisis.
A Treasury source said: “HMT is still committed to reform. We’re keen to understand the current functioning of the regulation and how it might be tailored to UK markets now we’re outside the EU.
“We are still reviewing responses to the consultation so it’s hard to say where we’ll end up at this point.”
A spokesman for the FCA said: “We support the Government’s approach of seeking views on whether there should be reform of the short selling regime in the UK.”
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