Britain offers lessons for US in protecting investors from abuse
For 10 years, Barbara Conway was the ``Scrutineer'' for London's Daily Telegraph. Her column examined and exposed all sorts of fishy and fraudulent investment schemes. Now she can barely conceal her glee at being part of a new anti-crime organization in the City of London.
``I wouldn't have missed this chance for the world,'' she says.
She works for the newly formed Securities and Investment Board. Its aim is to protect the rapidly growing number of British investors - and protect them in ways America could probably stand to emulate.
``We're not here to nanny people,'' Ms. Conway says. ``But there are proper risks and improper risks. A proper risk is when an investment goes up, down, or bust. An improper risk is when the investment company itself goes bust.''
In other words: Boiler rooms, Ponzi schemes, bogus securities, precious-metals scams, insurance fraud - any kind of investment rip-off that affects individual British investors is policed by the Securities and Investment Board (SIB).
That other famous investment crime, insider trading, comes under the authority of the Department of Trade and Industry and London's investment fraud squad.
All this is very important now in a Britain where Margaret Thatcher's push to create a ``shareholder democracy'' is accelerating and millions of new investors are entering the financial market each year.
Britain's 5 billion-a-year ($8.1 billion) privatization program, other investment incentives such as newly initiated Personal Equity Plans, and the sweeping deregulation of the securities industry last year has boosted the number of shareholders from an estimated 3 million in 1979 to about 10 million today in a nation of some 70 million. Shareholders are spread across all social and geographical groupings of Britons and as the Treasury trumpets: ``Share ownership in the UK is fast approaching that in the US, where perhaps 25 percent (25 percent) of adults own shares.''
``We do have to be careful,'' says an official with the Bank of England, which is ultimately responsible for keeping the financial system in Britain sound. ``People won't play again if they are disillusioned.''
Officials of the London Stock Exchange and the Treasury concur. With the largely electronic trading market that now exists in domestic and international equities here, stock exchange surveillance has been made much easier. As a result, there has been a continuing crackdown on investment fraud and insider trading.
A shareholder democracy could evaporate if cynicism arises about doing business with the City, London's Wall Street, especially in a nation where anticapitalist sentiments still run deep in many quarters.
What is most interesting about the SIB is that it is cleverly designed to turn a portion of the financial power and expertise of the City back on itself. It is a private corporation with the right to pursue criminal prosecutions. But it is funded by the securities, insurance, and commodities industries, through their self-regulating organizations.
The governor of the Bank of England, Britain's central bank, and the Secretary of State for Trade and Industry appoint SIB members and much of the staff is seconded for two-year periods from the investment industry.
Investors who have been swindled are repaid up to 48,000 ($77,760) by the industry, via the SIB. And anybody who offers an investment in Britain must be registered; if not, they can be prosecuted. (Newspapers and other media that carry advertisements for unregistered investment operations can be fined.)
So without the proper imprimatur, it's easy to tell the legal from the fly-by-night. The SIB is beginning a ``self-defense for investors'' campaign, too.
All very well, but what does this have to do with ``global markets'' or with the largely American investors reading this article?
For one thing, the crackdown on investment crooks - like the crackdown on insiders - is becoming a global affair. The Dennis Levine and Ivan Boesky cases had extensive overseas links. Late last year, the US Securities and Exchange Commission (SEC) and Britain's Department of Trade and Industry agreed to help one another more regularly. US and British banking regulators are cooperating as well.
But investor frauds have gone international, too. Con artists have long used places like the Netherlands Antilles as mail drops and refuges from prosecution. Recently they have been operating out of continental Europe, phoning into Britain to try to lure unwary investors with their too-good-to-be-true sales pitches.
``There were a vast rash of cheeky boiler rooms in Amsterdam and Belgium,'' Conway says, referring to high-pressure telephone solicitation efforts. ``They were preying on people in the UK, West Germany, and even in Australasia.''
Jurisdiction is a problem and international cooperation is essential, she says - although she feels the best weapon against such scams is large-scale publicity exposing them. Not only is it illegal to print an ad for an unauthorized investment, but a data base of approved companies is being made available to advertising departments.
Of course, the SIB is still getting organized under Britain's new Financial Services Act, so its effectiveness has not yet been tested, but the concept seems sound. The US should watch how the SIB operates very closely, for it could be a way to solve a difficult nationwide problem.
In the US, Southern California and Florida are hotbeds of boiler rooms, and soliticers almost always call from across state lines, the better to avoid state regulators. But even in the US there have been reports of cons operating out of the Caribbean.
The SEC, the Commodities Futures Trading Commission, attorneys general, and state insurance commissions try to police investment fraud. But con men continually find cracks in the coverage. Leveraged gold and silver deals, which have been widely exposed and reported in recent months, are a good example of scams flourishing because they are operating in the gray areas of regulatory oversight.
Periodic budget cutbacks also hurt US consumer protection efforts. Not so in Britain, where the financial services industry is required to pay for the SIB come what may. In a deregulated financial market, that seems like a good way to be sure that consumer protection rides the coattails of the global investment boom.