FSA to crackdown on investors dodging new rules

The City regulator yesterday pledged a crackdown on investors dodging new rules restricting bets against financial companies as Standard Life became the latest Scottish institution revealed to be the subject of hedge fund interest and HBOS saw a pause in its recent share price plummet.

The Financial Services Authority last week attempted to restore order to the stock market by banning investors taking short positions in a proscribed list of financial stocks and demanded they reveal existing positions of more than 0.25% of the companies' share capital.

The deadline for disclosure for the positions, where an investor borrows shares and sells them hoping to profit by buying them back later at a lower price, was 3.30pm on Tuesday.

There is widespread scepticism that there has been full disclosure in the UK with just one investor, hedge fund manager Paulson & Co, revealing a short position in HBOS, in its case of 0.95%. Fund management sources told The Herald they estimate the real position is closer to 4%.

Despite the pressure, HBOS, which has agreed to be bought by rival Lloyds TSB, had a calm day in the market yesterday, gaining 0.3% to close at 180.3p. Standard Life Investments disclosed it bought more shares in the Edinburgh bank, to take its holding to 3.08%.

HBOS is one of a number of financial institutions, including HSBC, Barclays and Royal Bank of Scotland, on a 34-strong list of stocks drawn up by the FSA in which new short selling is banned.

Also featuring are Dundee-based investment trust Alliance Trust, fund managers F&C Asset Management which has large operations in Edinburgh and Aberdeen Asset Management, and insurer Standard Life.

There have been teething problems with the stock list. The original one included Resolution Group which hasn't had a stock market listing since being taken over by Pearl in May.

Ironically it emerged that hedge fund manager Man Group, a well known user of shorting, had itself asked to be put on the list.

An FSA spokeswoman confirmed yesterday that short positions in financial stocks should have been disclosed on Tuesday. These can be maintained but have to be disclosed every day until they fall below 0.25% of the company's share capital.

She warned: "The people who have disclosed late we are being lenient with because it is the first days of the new rules. We know who holds these positions and we will not be happy with them if they are still disclosing positions on Thursday or Friday."

She added that not disclosing positions amounted to market abuse, which can bring with it unlimited fines and criminal charges.

Yesterday's disclosures revealed a number of financial institutions are the subject of shorting. Hedge fund manager AQR Capital Management, which was set up by former Goldman Sachs employees, has a 1.52% short position in Aberdeen Asset Management while Barclays's fund management arm and one of its hedge funds have a 0.69% position. In turn Barclays is being shorted by hedge fund manager Lansdowne Partners.

Mark Lyttleton, the high profile manager of the BlackRock Absolute Alpha fund disclosed a 0.39% short position in Edinburgh-based insurer Standard Life.

Hedge fund manager Eton Park International, previously best known for its backing of pension buy-out company Paternoster, and Brigade Capital Management have short positions in HSBC.

HSBC is the only large UK bank not being shorted by Paulson, headed by John Paulson who made billions of dollars last year betting against the US housing market.

Also being shorted are buy-to-let lender Bradford & Bingley, high street bank Alliance & Leicester which is being bought by Spanish bank Santander, HBOS's financial adviser arm St James's Place, investment bank Investec, fund manager Schroder, Anglo-Irish Bank and Bank of Ireland.

Deutsche Bank announced yesterday its short position in Friends Provident had fallen to 0.22%.

Meanwhile, Gordon Brown told the BBC he expects a new set of rules restricting short selling when the existing four-month scheme comes to an end.

Richard Everett, partner at the City law firm LG, who was the FSA's legal adviser until last month said the EU could also step in.

The New York Stock Exchange said yesterday it expected a ban on shorting of 900 financial stocks in the US to be extended for another 30 days beyond its October 2 expiry date.

Graham Campbell of fund manager Edinburgh Partners said the action taken by governments and regulators so far had restored some order to the market but worries still remain about the impact of banks scaling back their balance sheets.

"I think there is still a lot of volatility there but it has calmed down," he said.