DODGY traders beware.

The Financial Services Authority is finally showing signs of sharpening up its act. After years of criticism that the City watchdog failed to act swiftly enough to stamp out market abuse it was accused by angry MPs of being ‘asleep on the job’ the reinvigorated regulator is beginning to bare its teeth.

Chief executive John Tiner and chairman Callum McCarthy have been joined by Gay Huey Evans, the head of the FSA’s markets division. She has a ‘little list’ of those she suspects of market abuse and other questionable conduct.

Top of their hit list are the bear raiders. They indulge in short- selling, an arcane market practice involving selling shares they do not own in the hope of buying them later at a lower price.

While ‘shorting’ is by no means illegal, critics say it runs the risk of destabilising the market, particularly if large volumes of shares are traded.

The issue has surfaced at Room Service Group, an Aim minnow whose shares have been suspended following the collapse of a rights issue to reduce its 219,000 debts.

ANGRY minority shareholders claim the share price was artificially depressed because of shorting by market-makers while the company was temporarily released from suspension.

Those accused of shorting include broker Evolution Beeson Gregory.

Shareholders claim its dealings led investors unwittingly to buy more of RSG’s stock than was available to the market.

A shareholder action group claims minority investors lost out heavily and is seeking millions of pounds in compensation from Evolution and others. The broker said yesterday: ‘We never comment on trading activity.’ Fears over shorting are not confined to small companies. Last summer David Prosser, the chief executive of 6.6bn Legal General, called for a full FSA investigation into the practice after discovering that hedge funds were taking massive positions in UK shares.

He said: ‘Hedge funds have crept up on us and the authorities don’t have much leverage over them.’ Insurer Royal SunAlliance has spotted similar hedge fund shorting of its shares.

In a clear hardening of its stance on extreme cases, the FSA has heeded Prosser’s words.

Working with the London Stock Exchange, the regulator has launched an investigation into trading of Room Service Group shares.

‘We are looking at RSG and the issues surrounding the stock. Disruptions like this are not desirable,’ the FSA said. ‘The Stock Exchange has expressed concerns about this and we share those concerns.’ The FSA acknowledged that RSG’s case is ‘unlikely to be unique’ and signalled that the investigation could lead to a tougher line on extreme cases of shorting.

The watchdog said: ‘We are looking at this particular case, but more widely we may well reflect on the issue.’ The FSA’s latest intervention on shorting reflects renewed confidence at the regulator following Tiner’s arrival in September.

Tiner has seized control of the powerful enforcement division and unveiled plans to set up three business units covering wholesale markets, retail markets and regulatory services.

He is making ‘good progress’ in hiring three new 300,000a-year managing directors to run the units and has set up a ‘financial capability group’ to ensure consumers are better educated about financial markets and their potential pitfalls. He has also pledged to speed up the FSA’s sometimes lengthy investigations process.

As well as casting a preliminary eye over possible mutual fund trading violations in the UK, the FSA has warned it will crack down on cases of financial misselling.

It is an open secret that some of the City’s buccaneers have outwitted the watchdogs for years.

But perhaps the Square Mile’s shady characters will finally be dragged into the light.

Hard time for fund hotshots?

THE FSA has stepped up its probe into trading practices at British fund managers, as the string of scandals engulfing the US industry threatens to take hold here.

The City watchdog refused to name any of the firms in its sights.

But officials made clear that an initial examination of trading details had raised serious questions.

A spokesman said:’We contacted trade associations and individual firms asking for data on trades.We now need to go back to firms and ask them to explain the motivation for some of these trades.’ In a move that will send a chill down the spines of aggressive traders, the FSA is trying to establish the prevalence of ‘market timing’.This is a practice where hedge funds trade in and out of a mutual fund that fixes its price just once a day.

While legal, the FSA says it is ‘not in keeping with the ethos of the mutual fund industry’. Critics believe it disadvantages longterm investors.

The regulator is also looking for instances of ‘late trading’, which gives favoured investors a window of opportunity to deal while in possession of knowledge likely to shift the fund’s price.

No UK firm has been charged with any malpractice. But London- listed Old Mutual last week became embroiled in the US scandal after the two founders of its Pilgrim Baxter subsidiary there were charged with allowing favoured clients to make illegal trades.