Short Selling and Naked Short Selling

Interesting, until the last couple of days I always wondered exactly how short selling operated. I always wondered how the shares were borrowed. In the last few days, I now understand that Institutions Loan them out, to short sellers for a fixed commission, effectively, an interest charge. At this point, the shares do not change hands, just the rights to them to be bought and sold. This, I'm told is 'A Normal practice' and 'a valuable income stream to pension funds and the like'. Am I the only person who finds this amazing? I certainly couldn't sell something I borrowed, without becoming of interest to the police if the owner was sufficiently concerned.

Of even greater concern is naked short selling(NSS). this is where someone doesn't bother to borrow the shares, just sells shares that they don't own. This NSS is illegal, and there are some very detailed blogs in the US that argue that NSS is a huge problem. Where do we sit in the UK? Difficult to know, a cursory check has shown little to suggest that NSS is a problem, but I think a little more looking is required. Robert Peston's Blog on the BBC website has details of the fact the Bradford and Bingley have been shorted, but he believes that shorting helps a market rather than destroys.

I have 2 questions.

1) Does Naked SHort selling exist in the UK
2) how robust is our settlement systems? If the shares are not delivered, how strict is the regulation on reporting and prosecution of the people that fail to provide