Overnight the FSA legislated to ban certain types of short-selling (36kb, pdf) by declaring that shorting UK financial sector stocks was to be regarded as market abuse. The ban will be effective until at least 16 January 2009, it currently covers UK banks and insurance companies (12kb, pdf) and its scope may be extended to cover other sectors if market conditions warrant. Market makers are exempt.

The FSA has acted quickly in publishing emergency regulations designed to restore stability to the UK financial sector and the initial market reaction has been positive, with some banking stocks climbing by as much as 65 per cent and FTSE as a whole rising by more than 300 points. The price of this stability is a ban that would in normal market conditions seem draconian, but people currently seem to be willing to accept this price. Short selling is for the time being discredited - many stocklenders have voluntarily curbed their activities.

This same need for stability will also enable the Government to pass proposed legislation to change competition rules to ratify their expected intervention to push through the Lloyds TSB takeover of HBOS. In a financial emergency, as in any other, people may be more willingly complicit in the abrogation of their normal rights and freedoms. However, emergency legislation often stays on the books long after the emergency has receded. The FSA has already announced that in January it will conduct a comprehensive review of the rules on short selling and people are already questioning the long term wisdom of waiving competition rules to create a banking giant.

We expect the effect of these short term measures to be felt long after the current crisis has passed.