Commercial galleries Auctions Market United Kingdom

UK cracks down on auction rings

New law on joint acquisitions aims to stop market manipulation but could create headaches for dealers

Bang to rights: the law aims to stop dealers colluding on prices

Dealers who collude illegally on bidding at auction are more likely to face prosecution after changes to UK law that came into force on 1 April. Legislation on “auction rings” aims to stop dealers from manipulating the market by keeping auction prices artificially high or low. But the new rules, which require dealers who enter into legitimate joint acquisitions to disclose details of written contracts, pose problems for the art market, which is notoriously opaque and often favours verbal agreements over written contracts.

Typically, auction rings consist of dealers who work together to keep prices artificially low by agreeing not to compete against one another in the saleroom; one dealer will bid for a work and then a second, private auction is carried out among members of the ring, with the lot resold to the highest bidder. The difference in price is then distributed among the members.

Up as well as down

Dealers and collectors may also form auction rings to try to inflate prices for an artist or a group of works by pushing bids up. “If dealers with a dominant position in a given market were found to manipulate prices, by agreement among them or otherwise, they could be held in breach of competition law,” says Pierre Valentin, an art law specialist at the firm Constantine Cannon.

It can be legal to buy works jointly: if, for example, a dealer cannot afford a work outright or wants to minimise the risks of full ownership. But the agreement must not restrict competition.

The new regulations, part of the Enterprise and Regulatory Reform Act 2013, state that dealers who enter into a legitimate agreement must provide details of the contract to the auction house, including the names of the parties involved, the lots being bid on and a description of the arrangement. This could include a percentage breakdown of the financial stakes. Previously, dealers only had to notify the auction house that an agreement was in place, or submit a copy of the contract. New provisions also mean that prosecutors no longer have to prove that members of an auction ring have acted “dishonestly” (see box).

Full disclosure is difficult

Some in the trade say that dealers may be reluctant to disclose details of such contracts, particularly in the light of the encroachment of auction houses in the private sale market. “Dealers may only agree to act in conjunction with one another immediately before the sale, and possibly only by oral agreement, so for practical reasons it may be difficult to disclose the agreement in time,” Valentin says. He says that larger dealers may be at greater risk of prosecution, because it would be more difficult for them to prove that they could not afford a work outright and so any joint agreement might be seen as anti-competitive.

The major auction houses would not be drawn on the number of joint acquisition agreements they receive, but a spokesman for Bonhams said that the practice is “far from unusual”. Dealers contacted by The Art Newspaper would not comment on the matter.

Laws that govern joint bids

Enterprise Act 2002 and Enterprise and Regulatory Reform Act 2013: An auction-rigging arrangement is defined under the Enterprise Act as an agreement that bidders will either abstain from bidding or bid in a certain way. It is an offence for any agreement to distort competition. Under this act, a bidding agreement was legal if dealers informed the auctioneer of the contract before the sale, but the Enterprise and Regulatory Reform Act now requires dealers to disclose the “relevant information” relating to the agreement. Previously, under the Enterprise Act, the prosecution had to show that members of a ring-bidding arrangement had acted dishonestly. The Enterprise and Regulatory Reform Act has removed this dishonesty clause.

Competition Act 1998: This act prohibits any joint agreement that restricts or distorts competition. Dealers may have a defence if they are able to prove that they could not make a serious bid independently. However, this could be difficult to prove. Offenders may be liable to pay a fine of up to 10% of annual turnover.

Auction (Bidding Agreements) Acts 1927 and 1969: It is a criminal offence for dealers to give or accept a reward for abstaining from bidding at auction. Bona fide joint acquisition agreements are allowed, provided that dealers deliver a written contract to the auctioneer before the sale. The act does not stipulate what must be included in a contract.

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Comments

28 Apr 14
15:57 CET

TONY PHILIPS, MELBOURNE

Good, It's about time the English dealers played fairly. It should be a level playing field for all bidders. I have experienced English rings whilst bidding in London and it's very hard as an individual to purchase an item at public auction if you are bidding against the ring. One win for common sense!! I own an Auction house and I actively tell people that collusive bidding is not tolerated or legal in Australia.

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