Why is insider betting even a thing?

Dan Davies is a managing director at Frontline Analysts and an author. His most recent book is The Unaccountability Machine, which you can buy here and read about here, here, here and here.

The last two weeks have given UK voters reason to wonder whether British elections are regulated by the Electoral Commission or by the Gambling Commission. Several constituencies have effectively lost candidates as a result of investigations into whether they placed bets on the timing of the election based on inside knowledge, or whether they made “hedge” bets on an opponent to win.

Things have already been escalated to the Metropolitan Police. Anyone familiar with financial market regulation might be inclined to ask — why is the betting industry protected by such aggressive and proactive regulation? 

For one thing, the amounts of money involved seem to be pretty trivial. Try calling up the FCA and saying you’ve got evidence of £100 worth of insider trading but it needs to be investigated this week and can’t wait; see how you get on.

There’s also a reasonable question to be asked as to why “insider betting” should be an offence at all. The ability to have someone sent to prison for being better informed than you is a very great privilege indeed, and it’s not obvious what the bookmakers have done to deserve it.

It’s hard to believe today, but in many countries “insider trading” was not a crime until quite recently. It has been prohibited in the US for most of the 20th century but was only banned in the UK in 1980, and wasn’t a criminal offence in New Zealand until 2008.

In Lying for Money, my book about fraud, I argued that this was because insider trading is a “market crime”. Rather than being something that’s obviously against natural justice, it’s a convention or internal rule of a particular industry that’s found its way on to the statute book because that industry is so big and important.

Insider trading is not like stealing or counterfeiting; there is no Commandment which reads, “Thou shalt not use thy private information”. In most industries, finding out things that the customer doesn’t know and using this to gain an advantage is the epitome of good business. I don’t complain that my greengrocer knows more than me about the wholesale price of oranges. When I’m buying a house or a second-hand car, I accept that the vendor is likely to know a lot of things about its condition that they aren’t telling me, but unless there is egregious misrepresentation, the legal principle is caveat emptor.

The only good reason for departure from the buyer-beware principle is that people tend not to come back to a market where they think they will be taken advantage of. That was why the USA was the first country in the world to ban insider dealing — it wanted to develop a culture of mass participation in investment, and that couldn’t be done while retail investors thought that the whole market was rigged by well-informed insiders.  

Is there any such great public policy interest in encouraging wider public participation in gambling? 

Possibly, to some extent, in some cases. In the British Horseracing Authority inquiry into trainer David Evans’ misuse of information about a non-runner at his stables, the lawyer delivering the verdict said that “the sport of horseracing has a fundamental interest in honest and accurate betting markets”.

Which it does. But the sport of democratic politics has no such fundamental interest. Unlike horse races, General Elections are not (yet) run mainly for the purpose of creating something to bet on, and they are not (as far as I know) financially dependent on subsidies from the bookmaking industry. The only benefit that the political system gets from the existence of betting markets is a not-very-useful complement to opinion polling data.

Insider dealing laws were brought in to protect the average retail punter from being taken advantage of by big moneyed interests. The application of the same principle to gambling markets appears to have the opposite effect; on one of the very few occasions where a few sharp punters might be able to have an edge over the bookie, they’re being forbidden to use it. 

And this is in a context where the bookies are hardly defenceless; they have much more ability to close down accounts under their terms of service than the average financial firm, as well as the ability to get bets voided. Once more, what did the betting industry do for us, in order to deserve such privileges?

Historically, the British state took, for the longest time, the view that a very strict principle of caveat emptor applied to gambling. The 1845 Gaming Act made it clear that gambling debts were not legally enforceable, for example. The only protection the government was prepared to give was against cheating — the common law offence of fraud, in a gambling context.

All of which brings us back to the present day, and the odd status of “insider betting”. There is, in fact, no specific law against it. The 2005 Gambling Act updated the 1845 offence of “cheating”, but left the term undefined except for two non-exclusive examples of “deception or interference” in a game or race. 

Instead, what exists is a Position Paper from 2018 that’s no longer easily found on the Gambling Commission website, but which outlined the approach it intended to take in using its investigative powers. (Interestingly, the position paper seems to be more worried about the integrity of betting on things like the Celebrity Big Brother and Sports Personality Of The Year. Another major public policy interest, I’m sure you’ll agree).

It is by no means obvious how a trial would go. The Gambling Commission isn’t actually allowed to create criminal offences out of obscure policy papers, and the Supreme Court has ruled that the definition of “cheating” just means “what ordinary and honest laypeople would regard as dishonest”, which doesn’t move the ball very far. Would ordinary people think it dishonest for a reality-show runner to earn themselves a holiday in Ibiza at the expense of a bookmaker that provides no other value to the broadcaster? And when it comes to political betting, is there a worse possible time than a general election campaign to elicit intuitions from ordinary people about what they could be scandalised by?

Considerations like this are probably why, in the same position paper, the Commission makes it clear that it planned (in 2018 at least) to make very rare and sparing use of its powers of criminal investigation. For the most part, the Commission works through sports governing bodies like the Football Association and the British Horseracing Association, who have much stricter and more defined rules about the acceptable use of inside information, along with powers to fine their members or ban them from the sport.

Of course, there is no sports governing body for politics (or for reality television either). But does that mean that the fallback option should be the criminal law? Or rather, does it suggest that the bookmakers ought to stop making betting markets on these things at all? Their alternative is to accept that taking the occasional bet from informed punters (which they can then use to increase their own already substantial information advantage over the general public) is part of the cost of doing business.  

These are the sorts of questions which ought to have been asked a long time ago, before the Gambling Commission made its ill-advised foray into electoral politics. But it seems like they weren’t.

The development of the market crime of insider dealing in financial markets has been so successful that everyone has forgotten that it’s not a common law offence. Caveat emptor (or in this case, “caveat bookie”) is the right starting point for all markets, and the criminal law should only depart from it if doing so is overwhelmingly in the public interest.