Jan. 5 (Bloomberg) -- Barclays Plc, HBOS Plc and 32 other U.K. financial companies will no longer have protection from short-selling, Britain’s financial regulator said today.

Britain’s temporary ban on short-selling, introduced in September after politicians and investors blamed the practice for market instability, will expire on Jan. 16, the Financial Services Authority said today in a statement. The London-based agency said it could be reintroduced without consultation if necessary.

“It’s a Christmas miracle,” said Darren Fox, a regulatory lawyer at Simmons & Simmons in London who advises hedge funds. “The FSA got it right. The circumstances have changed and there is no longer the emergency that prompted the ban.”

Regulators around the world are trying to grapple with measures to stem the worst financial crisis since the Great Depression. The FSA’s move clashes with that of its European counterparts in Germany, France and Belgium, where similar bans were extended until March. U.S. Securities and Exchange Commission Chairman Christopher Cox said last month that its short-selling ban for three weeks in September was ineffective.

The FSA will also extend a rule requiring disclosure of short positions in financial companies through June. Investors currently must disclose short positions that existed before the ban if they are more than 0.25 percent of issued share capital, with additional reporting if that changes. The FSA said today that the rule will be amended, with extra disclosure only required if the position changes by more than 0.1 percent.

‘Very Worrying’

“This is potentially a very worrying development,” said Vince Cable, an economic spokesman for the Liberal Democrats. “The FSA doesn’t seem to have grasped the central point that banks are different from other companies because they involve systemic risk.” A necessary counter-point to short-selling was a tough regulator to counteract market rumors, which the FSA has “been very weak” on stamping out, he said.

The FSA said it may reintroduce the ban whenever it sees fit, a pronouncement welcomed by other lawmakers. “The industry is on probation,” said John McFall, a Labour politician who chairs the Treasury Select Committee. McFall told the Financial Times last week that credit-market conditions hadn’t changed significantly for the ban to be lifted.

False Rumors

The temporary ban, introduced Sept. 18, came after HBOS lost 37 percent of its value over three days. It is being taken over by Lloyds TSB Group Plc. In March, HBOS’ shares plunged 17 percent in a day because of rumors about its ability to access funding. The FSA’s investigation into the spreading of false rumors yielded no culprits.

The FSA is consulting until Jan. 9 on the changes proposed today. It will publish a consultation paper on long-term proposals on short-selling by the end of this month, it said.

“These proposals are the right measures for maintaining orderly markets,” said Sally Dewar, the FSA’s managing director of wholesale and institutional markets, in a statement. “Continuing the disclosure obligations as we propose will reduce the potential for abusive behavior and disorderly markets.”

International regulatory bodies like the International Organization of Securities Commissions and the Committee of European Securities Regulators are also reviewing their recommendations.

‘Open Season’

“It’s open season on short-selling,” said Chris Bates, a regulatory lawyer at London-based Clifford Chance LLP today before the FSA’s announcement. “As in politics, this is a global problem and regulators will want a global solution.”

Short-selling is when hedge funds and other investors borrow shares and then sell them in the hope that the price will fall. If it does, they buy back the securities at the cheaper price, return them to their owners and pocket the difference.

“Continuing the current ban could give rise to speculation that short selling could ultimately be forbidden altogether and, as we have always said, legitimate short selling can be useful,” said the British Bankers Association.

Hedge funds say they suffered unduly because of the ban. A study by Ian Marsh and Norman Niemer of Cass Business School in London commissioned by the Alternative Investment Management Association, a group that lobbies for hedge funds, last month said the ban is counterproductive by reducing trading and hedging activity, raising the costs of trades and reducing market liquidity.

“We hope that other regulators around the world will take note of the FSA’s decision and lift the remaining short selling bans,” the AIMA said in an e-mailed statement today.

To contact the reporters on this story: Caroline Binham in London at cbinham@bloomberg.net

Last Updated: January 5, 2009 14:30 EST