Insider folly

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There has always been an unrepentant minority in the City who hold that insider dealing should not be a crime. If you have better information than the next guy, good luck to you; that's part of the game, they argue. Not many right- thinking people would share that view in its undiluted form. For most of us, the man who abuses his position of trust within a company by using confidential information to make money for himself or friends is guilty of a form of theft. But what about the wholly different case of someone who, say, overhears on an airplane that German steel prices are about to be cut 20 per cent and, realising this will be bad news for British Steel, goes out and sells the company's shares short? Is he guilty of a crime?

The big question, as always, is where you draw the line. As the law stands, insider trading is quite narrowly defined - so narrowly, in fact, that the Act has come to be seen as virtually worthless. Even in quite clear-cut cases of abuse, it has proved difficult to secure successful prosecutions. And it remains perfectly legitimate for big banks to deal with impunity in the forex and gilts markets using advance knowledge of a change in interest rates or some other highly price-sensitive piece of government information.

Plainly the present law is inadequate, but that hardly excuses the Treasury's latest muddled and over- the-top stab at the problem. To say that City practitioners are angered by the draft new law on insider dealing due to be introduced to Parliament this autumn is an understatement; they are horrified by it. Having previously made the mistake of defining the crime far too narrowly, thus creating a tapestry of loopholes through which the determined insider could climb, the Government has now gone the other way and defined it so broadly that practitioners are going to find it difficult to deal at all without committing an offence.

Under the new proposals, the moment you use any information not in the public domain that is later judged to be 'significantly price- sensitive', you are in danger of stepping on to the wrong side of the law. The present Act requires some kind of connection - direct or indirect - with the company whose shares you are buying or selling for you to be guilty of insider dealing. Not so the new one. Though the Treasury denies that this is the intention, the new law appears to classify virtually anything that hasn't been published as inside information.

Certainly the case of the man who uses information on German steel prices to deal in British Steel shares would be caught. It's much worse than that, however. Most worthwhile brokers' research would also appear to constitute inside information under the new proposals. The practice of 'front running' - giving your clients a chance to deal on market-sensitive research before it is published to the world at large - would be outlawed.

So too would the process of deducing after lunching with a company that the general consensus of profit forecasts in the market is far too optimistic. Brokers lunches would become a thing of the past; there would be no point in them if all you could discuss was what was in the latest press release or annual report. The moment a broker published anything of real value giving new insight into a company's prospects, he would be up in front of the insider dealing unit. A market starved of reliable information about companies in this way would soon develop some quite disturbing distortions and become a hostage to any kind of wild rumour.

To be fair to the Treasury, this cloud-cuckoo land of an insider dealing law is not wholly of its making. Though ministers apparently agree with its general thrust, it is actually a product of Brussels. As with many an EC directives before it, ministers do not seem to have fully thought through its implications before agreeing to be bound by it. Now they are going to have to live with the consequences. More to the point, so is the market, which is rapidly approaching the stage of such wide-ranging over-regulation that practitioners will soon be afraid to get out of bed in the morning.