By John O'Donnell and Huw Jones
BRUSSELS/LONDON Jan 22 The European Union's top court has dismissed Britain's challenge to a law on banning the short-selling of shares in market emergencies, dealing a blow to UK attempts to limit the influence of EU rules on the City of London.
British Prime Minister David Cameron had been seeking to limit EU controls on London, the bloc's biggest financial centre, reflecting a broader attempt to renegotiate the country's membership of the EU ahead of a promised referendum on staying in the bloc.
But the court's ruling means British regulators would not be able to opt out of the short-selling law, which gives the European Securities and Markets Authority (ESMA) power to ban bets on falling share prices in instances which it sees as a threat to markets or the stability of the EU financial system.
London has traditionally been less keen on such a ban than other centres, seeing it as a short-term impediment to market liquidity which ultimately is the best determinant of a stock's value.
"The power of the (ESMA) ... to adopt emergency measures ... in order to regulate or prohibit short-selling is compatible with EU law," the Luxembourg-based court said in a statement on Wednesday.
"As all the pleas in law relied on by the United Kingdom have been rejected, the Court dismisses the action in its entirety," it said.
Short-selling refers to the sale of borrowed shares in a bet the price will fall so they can be bought back more cheaply to turn a profit. It remains controversial because some regulators believe it can add to stock market weakness at times of crisis or great volatility.
Britain's finance ministry, which mounted the challenge, said it was "disappointed" by the ruling and would respond in full at a later date.
"We've consistently said we want tough financial regulation that works, but any powers conferred on EU agencies must be consistent with the EU Treaties and ensure legal certainty," the UK Treasury said.
Polls suggest Cameron's government faces a drubbing in May's European Parliament elections by the anti-EU UK Independence Party (UKIP), whose leader Nigel Farage said: "The institutions in Brussels despise the City of London and what they see as its Anglo-Saxon practices.
"We demand that the British government has control over British industry. This ruling exposes their impotence. The City is totally at the mercy of the European Commission."
The British Bankers' Association, a lobby group whose members include Barclays, RBS and Lloyds , said the UK should build closer ties with the EU and devote more resources to influencing its financial reforms.
London is home to the London Stock Exchange and is the EU's biggest share trading centre. Britain has mounted several challenges to EU rules in a bid to draw a red line on how much more power over its financial sector can be delegated to EU supervisors.
Cameron has promised a referendum on UK EU membership in 2017, assuming his Conservative party win an election due in 2015, and the bloc's euro zone countries are forging closer ties through the creation of a so-called banking union, a move many in the UK fear will sideline British interests.
"This decision could give the new European Parliament and the European Commission the green light to confer more powers on the regulatory supervisors," said Alexandria Carr, a regulatory lawyer at Mayer Brown.
An advisor to the court had sided with the UK in an opinion last September, saying the emergency power went beyond what the watchdog could do under the EU treaty provision used to approve the law.
But the court ruled that under the short-selling law, the ESMA's power was "precisely delineated" so it could only go above the heads of national supervisors if they had taken no action to deal with disorderly markets.
Lawyers have said that if Britain had won the challenge, it could have forced the EU to row back on various financial rules in the pipeline.
Britain is also challenging three other EU rules: A cap on bankers' bonuses; plans for a financial transaction tax; and the European Central Bank's attempt to force some clearing houses to relocate to the euro zone.