According to The Times Online, Britain's Financial Services Authority (FSA) is looking into insider dealing, launching the biggest operation against such shady tactics ever.

Six men were questioned after the FSA carried out early morning raids on 16 homes and businesses in London, Oxfordshire and Kent. The FSA took documents and computers as part of a joint investigation (with the Serious Organised Crime Agency -- seriously) that started in 2007.

Now here's a simple, straightforward plan for British banks that are deemed "too big to fail": By the end of the year, large British banks will be required to draw up "living wills" in which they outline procedures to help them wind down in the event of failure.

The living wills will also include ways of separating the banks' deposit-taking arms from securities trading units.

The Financial Services Authority (FSA) will also require the too-big-to-fail banks to hold more capital as protection in the event of a bank failure. The authority has said that bumper bank profits are to be used to bolster balance sheets -- not for bankers' bonuses.

In the UK, a number of hedge funds are about to sue the Financial Services Authority claiming that it did not have the proper authority to curb short-selling, which cost the funds million of pounds. The FSA is a first cousin of the SEC and performs a similar role.

According to The Telegraph, "Lawyers are being galvanised on behalf of a raft of hedge funds which claim the financial watchdog has illegitimately extended its powers and caused 'wide-spread capital destruction.'"

Whether or not their argument has legal merit, it does have a certain amount of fairness on its side.

Naked shorting, a practice in which investors bet a stock will go down without properly borrowing shares to cover the trade, has always been illegal. The act of shorting itself has for decades been a legitimate enterprise. It acts as a check-and-balance system so that stocks do not rise relentlessly without those who believe they should fail having a stake in the matter.

The SEC has not only done financial harm to a number of hedge funds, it also has taken all of the teeth out of a process that has given trading in stocks an economic and market legitimacy.

If hedge funds sue, they are in the right and ought to prevail.

Douglas A. McIntyre is an editor at 247wallst.com.