The ban on the short-selling of shares that was introduced to protect Britain's banks is to be lifted.

The Financial Services Authority (FSA) said that the ban, which was imposed in September and covered the shares of 32 financial companies, would cease after January 16. However, the City regulator said that it planned to continue to force investors to disclose their short positions until June 30 at least.

Short-sellers sell borrowed shares in companies they expect to decline in the hope of turning a quick profit by the time that they need to buy them back to settle their trade. The practice, often executed by hedge funds, has been widely blamed for exacerbating the financial crisis, with opponents arguing that the volume of short-selling drove down the share prices of financial services companies, damaging confidence and fuelling a downward spiral in the banking industry.

Vince Cable, the Liberal Democrat economics spokesman, said: “This is a worrying development. The ban was introduced because of the impact of short-selling in banking stocks, which can be problematic because of the systemic risk they pose. If banks go down, the taxpayer has to pick them up.”

Sally Dewar, managing director of wholesale and institutional markets at the FSA, defended the regulator's actions. She said that continuing the disclosure obligations would reduce the potential for abusive behaviour and disorderly markets, but added that the FSA would not hesitate to reinstate the ban if necessary.

The disclosure rule requires a company to alert the markets every time it changes its short position in any of the 32 financial stocks on the list. The rule is being amended slightly. At present, a short-seller must notify the FSA if a net short position exceeds 0.25 per cent of a company's issued share capital, with further disclosures required if there are any changes in this position. From January 16, notification will be required only every time a position moves by 0.1 percentage points since the previous notification.

When the ban was introduced, after a run on HBOS stock, Hector Sants, chief executive of the FSA, said that short-selling had given “rise to disorderly markets”. Although short-selling was “legitimate” in normal conditions, he said, a temporary prohibition was needed to “protect the fundamental integrity and quality of markets”.

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