Britain’s top City regulator is examining whether to extend disclosure of short-selling to all 3,489 companies publicly traded in the UK.

The consultation comes as global financial regulators struggle with the issue of how to police short-selling, a practice that many politicians accused of exacerbating last year’s financial crisis.

The Financial Services Authority (FSA) has decided to relax an outright ban on short-selling banking stocks, which had been in force since September. Short-sellers – those who make profits from betting that stocks will fall – caused chaos in the banking sector when banks were desperate for fresh capital.

From January 16, investors will be allowed to short-sell banking shares, provided that they disclose it. The FSA is now consulting about whether to extend those disclosure rules to cover every quoted company.

At the time of the ban on shorting banks, the FSA was inundated with calls from nonfinancial companies that wanted to be included on the list and be protected from short-selling by hedge funds.

Andrew Shrimpton, a former head of hedge fund regulation for the FSA who now advises Kinetic, a consultancy, said that expanding the rules would be an unwelcome move. “I can understand why they are doing this,” he said. “The FSA has faced problems with defining ‘financial’ stocks – firms have pleaded to be included on the list and the regulator has had to make a judgment. But no one wants to add to the boom in disclosure requirements by extending the list from 34 to thousands of shares.”

Tim Steer, a fund manager for New Star Asset Management, said: “The problem is that this is going to discourage the setting up of hedge funds, both for the retail and the institutional market, just when we need their liquidity and ability to outperform.” Mr Steer accused the Government of using the FSA to blame hedge funds for the financial crisis.

Others, however, said that the disclosure extension could serve a wider purpose. James Palmer, a partner in Herbert Smith, the law firm, said: “This is what the market was generally hoping for and the slightly more pragmatic disclosure regime will be welcomed.

“At the time of the ban, numerous market participants tried to persuade the FSA that a transparency regime without a ban was the right way forward; we might now end up there.”

Although short-selling is most closely associated with hedge funds, the practice is widespread among pension funds, insurers and other traditional investors relying on it for risk management.

Chris Hitchen, the chairman of the National Association of Pension Funds, said that the FSA was right to drop its ban on short-selling, but backed the idea of extra disclosure. “Speculators might be unhappy about onerous disclosure requirements, but transparency of significant positions should help to allay institutional concern,” he said.

Critics argued that aggressive short-selling against HBOS during its £4 billion rights issue last year helped to destabilise the struggling bank. They said that its survival would have been threatened had the FSA not moved to put the ban in place.

Hedge funds argued that they were being unfairly singled out. They said that the continued falls in shares in UK banks simply reflected the sector’s gloomy prospects and showed that long-term investors were bailing out.

The Association of British Insurers, whose members own 15 per cent of the stock market, said: “These seem to be the right type of questions that need to be asked by the FSA. We will respond through the relevant consultation.”

The Alternative Investment Management Association, a hedge fund lobby group that has been a vocal critic of shorting bans, said that it would wait until the FSA published its full consultation document before taking a view.

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