The Art Market: Unregulated Unscrupulous And Worth Billions
“Apart from drugs, art is the biggest unregulated market in the world;” declared art critic Robert Hughes at the start of his 2008 documentary Mona Lisa’s Curse. In an opinion piece for the New York Times, former Wall Street banker William Cohan described the art market as “utterly unregulated” and “a very dangerous place, populated by any number of unscrupulous figures.”
This characterisation is both a cliché and largely accurate: the art market really is distinctly different from other legal markets. A paucity of regulation, combined with certain features of the market itself, allows a range of dubious practises to persist that have long been driven close to extinction elsewhere. Most discussions, however, tend to abandon their indictments at the stage of broad generalisation, so Artlyst decided to pursue some clarity.
Daniel McClean, a lawyer specialising in art and cultural property law at Finers Stephen Innocent, breaks the issue down into two parts.
“There are the types of laws themselves – and yes, the framework of regulation is less than in other areas,” he says. “But just as important is that, even when there are regulations, they are far less likely to be adhered to. If you want to launder money, for example, putting it into an artwork has historically been a great way to do it.
“However, it’s important to recognise, paradoxically, that the power and vitality of the art market is a function of the fact that legal rules and norms are less likely to be adhered to,” he adds.
To take McClean’s first point, there are certain regulations that, in place across most markets, simply don’t exist in the art world. As an example, McClean points to dealers manipulating the prices of artists in whom they have a vested interest.
“You have dealers who are effectively agents of artists bidding on artworks at auctions to prop up the value of their artists’ works,” he explains. “It’s almost entirely unregulated, whereas were it to occur in other forms of business it would likely be heavily regulated."
Kenny Schachter, a London-based art dealer, also cites the lack of regulation of the consultancy businesses that have blossomed in the art market’s fertile soil – though he employs a less complimentary metaphor.
“There’s a cesspool of private dealers and advisers and quasi-professionals,” he says. “When you’re selling a work of art there’s not really any pricing structure, so the fee could range anywhere from 2% to 500%.
“There’s also a very low access point to the fine art world,” Schachter continues. “Anyone can become a consultant or dealer or adviser from one day to the next, with little or no expertise and nothing being required of them. It’s often the case that someone offers something legitimately, and before you know it there’s 12 links in the chain, which is just a layering up of commissions on top of each other.”
Regulation Abhorred and Ignored
Alongside regulations that are missing altogether, McClean describes a culture which is content to operate beyond the legal framework ostensibly in force.
“It’s just not the way in which people classically do business,” he says. “So you can get a conflict between how people do business in the art market and how the legal rules work.”
This attitude is expressed by major figures within the market. “Forget right or wrong,” advised Manhattan-based art collector Adam Lindemann in the New York Observer. “Art is a handshake business, and if someone treats you poorly, don’t deal with them again, but don’t go public with your gripes: it’s bad form, and will result in bad karma.”
When asked for specific examples of laws that have been disregarded, McClean cites instances in the secondary market where dealers, acting as agents, have taken unauthorised commissions from their clients. An example, which reached the law courts in 2010, was a dispute between Accidia Foundation and the dealer Simon Dickinson Limited. The court verdict ruled that Dickinson had taken a hidden £1m commission when it sold a drawing attributed to Leonardo da Vinci to a collector for £7m, and the seller only received £6m.
“Often, advisors and dealers in the secondary art market, particularly where there is a chain of agents in a deal, take a cut from the sale which has not been authorised by their principal, whether this be a seller or a buyer. In many cases, they are not even clear which party they are acting as agent for,” says McClean.
Art dealer Kenny Schachter points to insider trading as another example of behaviour that bypasses legislation.
"Insider trading is not exactly sanctioned, but it is certainly permissible,” he says. “If you have information about a major retrospective of an artist coming up then you can trade ahead on the basis of that information. The perfect example is Gerhard Richter: since his retrospective was announced and finished there’s been around a 50% movement in his prices.”
A reliable source within the London art world, who wished to remain anonymous, expanded on Schachter’s point, arguing that a more serious issue is dealers interfering with how museums and other institutions function.
“Dealers can have advance knowledge of retrospectives and so on, but I think it really becomes wrong when dealers are manipulating institutions,” the source says. “In reality they often do, because powerful dealers have power over institutions. They can put pressure on a museum to endorse an artist and so increase their value – it’s a very nebulous area and very difficult to prove empirically, but it does happen."
The same source says that collusion between dealers is also common, working to further inflate prices.
“Another form of market manipulation is collusion between dealers in market pricing. The final price that’s achieved is often not reached through competition, but is promoted through price fixing: an artist has four dealers, and they all agree that they’re not going to sell below a certain price. It’s anti-competitive, it’s monopolistic, so it is officially illegal even within the art market, but it’s very difficult to deal with. There aren’t many instances where people have brought cases for antitrust behaviour.”
Elsewhere, droite de suite is a regulation which gives artists re-sale royalty rights, meaning they should receive a portion of the proceeds when their artworks are sold on by dealers or auction houses. It entered UK law in 2006, but ensuring that these rights are enforced in practise has proven very difficult, particularly in the case of less-established artists. Rebecca Salter, a London-based abstract painter, argues that it is precisely this group that needs to be protected.
“Once artists become very famous then they can wield some power over their treatment by a gallery,” she says. “But I have always been concerned about artists lower down the food chain, when they are really quite vulnerable.”
And The Auction Houses?
Alongside the dealers and agents and advisers, there are also the auction houses, whose practises have often been accused of lacking transparency. A decade has passed since Sotheby’s and Christie’s were convicted of price fixing in the mid-nineties, after an investigation found that their respective Chairmen had met privately "in a car park" to discuss how they could most effectively collude.
Schachter assumes that this has led them to clean up their act. “After these antitrust cases, I think the auction houses are clean. It’s more the people in the audience who are likely to be doing something naughty.”
But their practises are still controversial. In 2008, they introduced the concept of ‘the irrevocable bid,’ a form of third-party guarantee which allows someone to put in a bid of an undisclosed amount in advance of a piece’s public auction. If the irrevocable bidder wins the piece, they still pay the buyer’s premium. If they don’t, they get a cut of the difference between their bid and the amount that is eventually paid.
This is an effective way for the auction houses to maximise both the buyer’s and seller’s premiums, and to avoid having to finance guarantees themselves. Meanwhile, the irrevocable bidder has the advantage of access to inside information that enables them to secure a bid before anyone else has seen the catalogue. Moreover, the existence of the undisclosed ‘irrevocable bid’ cajoles ordinary bidders to bid not only above the reserve, but beyond that to ensure that they beat a second undisclosed price point. As a previous Artlyst article asked, “Can you imagine a public property auction operating this way?”
A Libertarian’s Fantasy
Compared with any other legal market, it is clear that the art market is uniquely unconstrained by regulation. Figures within it, though, argue that this doesn’t prevent it functioning efficiently.
Spencer Ewen, Managing Director at Seymours Art Advisers, suggests that it operates effectively through self-regulation.
“You’re right it’s unregulated, but I think it’s a fairly efficient self-regulating market,” he says. “By the very fact that there’s a lack of contractual associations between all parties, there’s a tendency to self-regulate by people verifying and getting second opinions. I think that if people are operating inappropriately then they are found out fairly quickly.”
Ewen adds that most participants aren’t interested in tighter regulation.
“I think if people are engaged in the art world then they are aware of what goes on,” he says “If people want to spend their money on doing whatever they’re doing then that’s their prerogative.”
As Ewen’s outlook implies, the art market is as close to a libertarian’s fantasy as a legal western market gets. It has become an experiment in laissez faire economics for the edification and entertainment of the super-rich. There may be side-effects for everyone else – money laundering, tax evasion, abuse of the rights of less-established artists, even (according to some critics) a corrosion of the aesthetic and spiritual power of visual art – but calls for greater regulation rarely come from within the art market itself.
“It’s like picking up a rock and finding a bunch of vipers intertwined together,” says Schachter. “They’re a difficult bunch because there’s a zero sum mentality where one person succeeds at the expense of another. It’s a ruthless place.”
Which leaves the rest of us with a question: should the vipers be left alone to play their little game?
Words: Toby Hill © ArtLyst 2012