In 2023, the City will see a myriad of financial regulations come into effect. As John Newlands explored in his December 2000/January 2001 article for Professional Investor, regulations are nothing new, and, judging from the number of historical scams that took place in the financial industry, many of them seem to have been desperately needed.
In his research, John Newlands found two ancient English dictates regulating the behaviours of brokers. The first, put in place by Edward I, was announced in 1285. The second was decreed by James I in 1442. Both of them, Newlands suggested in his December 2000/January 2001 article in Professional Investor, reveal that there is nothing new about the quest for registration and regularity in financial markets. Newlands went on to explore six of the ways that scammers have tried, over the years, to circumvent the rules.
False Rumours: In 1814, a certain M De Berenger faked the death of Napoleon, causing the price of UK government securities to soar. De Berenger and his accomplices coolly sold a £1 million’s worth, pocketing £10,000 in profit before they were caught.
Working as a Pair: Two people work together to take advantage of a single stock, preferably a volatile one, and then divide the spoils.
Bare-Faced Fraud: In 1806, Joseph Elkin Daniels, a well-known City figure, asked his broker to purchase £30,000 of stock and paid for it with a bank draft that could not be cashed until that afternoon. Daniels was able to sell the stock to other brokers shortly afterwards, cashing in their cheques and absconding before the bank draft had bounced.
Price Sensitive Information: In the days before insider trading regulation, company directors would share privileged information with their friends and colleagues without thinking twice, sometimes over lavish lunches or other gatherings.
Clients Name Later: The ability to purchase a stock with the caveat that the broker would add the clients’ name in after. If stock remained static or fell, it would have gone into a client portfolio as a medium or long term hold. If it outperformed, it could have been placed in the broker’s name.
Bare-Faced Fraud II: After WW1 it was imperative to rebuild the country and its finances. One official campaign, the ‘Peace and Joy’ loan scheme, raised £40 million in three days in 1919. Horatio Bottomley, spurred by the success of the scheme, decided to set up his own operation, the Victory Bond Club, from London, and then the Thrift Prize Bond Club in Paris. Suffice to say, despite raising millions in official government borrowings during the war, both Bottomley’s endeavours were fraudulent.
While there have been many discussions about the burdens of regulations, and whether regulations are too onerous, with unintended consequences, Newlands' article is a reminder of how effective regulations can actually be.