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Stock lenders and sort-sellers carry on as usual

The challenge of tackling the City fails when the rewards of success are too great

There seems to be little appetite in parliament for a wholesale reform of the City. While the high-street banks are subjected to intense debate, stockbrokers and fund managers pursue profits away from the spotlight. Even the revelations that many investment firms can lend up to 100% of their holdings to short-sellers – whose mission is to drive down the value of those investments – is unlikely to provoke any action.

Research into the practice of stock lending shows some investment firms are retaining up to 40% of the fees they earn for lending some, or possibly all, of the shares in particular funds. When many other avenues for making money have dried up, the substantial fees that can be generated by stock lending are just too good to ignore. Short-sellers need to borrow shares from funds to make their contracts work. In recent weeks they have been particularly active, as the stock market has headed south. Last month was the worst month for the FTSE 100 since the Greek crisis in May last year and short-sellers will have made big gains.

Challenging the fee structures set by stock lenders is simply not in the interests of short-sellers. The rewards of success dwarf the fees. And that is the challenge when tackling the City. Everyone inside the citadel believes fees and commissions drive innovation, the entrepreneurial spirit and client satisfaction. Regulators do little to challenge this nonsense, apart from periodic short- selling bans. The City watchdog has prevented independent financial advisers, most of whom operate on the high street, from selling commission-based products. But inside the Square Mile and Canary Wharf, investment firms, whose clients are equally anonymous City operators, continue.

Pension funds spend billions of pounds every year paying fund managers who churn their shareholdings. Research that shows the pension funds emerge worse off is ignored and the process continues. We know two-thirds of active fund managers underperform the index. Their failure is exacerbated by paying huge stockbroking fees.

Every cost is passed on to the ultimate client – ordinary investors. A saver who started investing 20 years ago in a personal pension is lucky to emerge with more than their contributions. Much of the share price gains are stolen in fees and charges that few understand.

All these City practices should be torched by the regulator. Instead it presents a menu of consumer choice with a side order of financial education, which survey after survey shows has done little to raise consumer understanding. Most politicians are in the same boat. They have no idea how their constituents are being fleeced. Stock lending and short-selling are symptomatic of a more general malaise where City practitioners exploit investor fear and greed, largely for their own ends. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds