Britain files suit against EU over short-selling rules

LONDON, June 1 Fri Jun 1, 2012 8:45am EDT

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LONDON, June 1 (Reuters) - Britain has filed a lawsuit against the European Union in a last-ditch bid to thwart giving new European financial regulators the power to ban short-selling shares against London's will.

It is the second time in a year that Britain's Conservative-led government has filed legal papers against the EU - an extreme measure which experts say reflects growing alarm amongst British lawmakers about the UK's declining say in EU matters and loss of regulatory sovereignty.

Britain's finance ministry has lodged papers at the European Court of Justice seeking legal clarity about powers that will give the European Securities and Markets Authority the power to ban or restrict short-selling across the 27-member bloc, Reuters has learned.

It argues that the new rules, due to take effect in November, will give ESMA undue influence and is citing a half-century old landmark case about the balance of institutional powers within the first incarnation the European Union.

A spokesman for the Luxembourg-based ECJ said no application has been received from Britain yet.

The UK insists that it supports the EU's markets watchdog and the short selling regulations. But it wants to establish whether ESMA has the legal right to impose a short-selling ban and avoid countries questioning such decisions by the regulator during a crisis.

However, Britain's former Labour government had signed up to the rules creating ESMA and two other supervisory bodies in the aftermath of the 2008 financial crisis, and experts say the latest move looks like an attempt by a "Eurosceptic" Conservative-led government to claw back power.

"It reflects the shift of power away from the UK as a member state to the EU authorities, that they don't have the same power to influence behind the scenes as they used to have," said Michael McKee, a specialist in financial services law at DLA Piper.

"Now they are left using one of the more nuclear weapons."

Britain has often found itself at odds with its larger European peers France and Germany over financial regulation issues such as bank capital requirements and a financial transaction tax, which it feels could harm the UK's status as a world-leading financial centre.

Britain says its legal challenge is being supported by other countries. But the Czech Republic, a past ally of the UK in EU matters, said on Friday it had no plans to launch a similar lawsuit.

"All these lawsuits demonstrate how hopelessly outside the process Britain is. They are missing the magnitude of what's going on," said Graham Bishop, an adviser to the EU on financial regulation.

The UK is already asking the ECJ to rule on the validity of a European Central Bank policy requiring clearing houses that handle a large amount of euro-denominated financial instruments to be based inside the euro zone. London sees this as a direct attack on the business model of LCH.Clearnet.

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