Thirty years on, the planning of the biggest shake-up of the City of London in centuries looks oddly chaotic. Cecil Parkinson, the secretary of state for trade and industry, had to resign in a sex scandal weeks after reaching agreement with the stock exchange. His successor Norman Tebbit described the reforms as “heaving a massive brick into the once tranquil waters of the City”. And that summed up the strategy. As Britain prepares to leave the EU, we are at another inflection point in the City’s fortunes. What lessons can we learn from Big Bang?
For all the apparent lack of strategy, financial services went on after October 27, 1986 to become one of the UK’s few globally dominant industries. It powered the economy by facilitating the creation of jobs and wealth. It sucked in valuable overseas earnings and its taxes helped keep the exchequer in funds. It was the means by which prime minister Margaret Thatcher’s free market ideals were converted into practice. It facilitated the privatisation programmes of the later 1980s and 1990s. It was the mechanism by which sleepy, statist British industry was woken up through the takeover of underperforming companies. It managed the country’s debt. None of this would have been possible on the scale that was required without the Stock Exchange reforms of 1986.
Yet, as we now know to our great cost, there were unwelcome effects, too. As pay spiralled ever higher in the City, greed replaced loyalty in the contract between employer and employee, and between banker and client. The City’s new transactional culture spread into other sectors and into everyday life. The mantra “let the market decide” led to a culture of short-termism on the part of shareholders and the companies in which they invested. Consequently, serious under-investment in industry set in. A misplaced faith in risk management led to too much leverage and too little capital among banks. Free market economics did not start or finish in London but the Big Bang reforms of which they were part helped to shape economic and social life in the past quarter of a century for good and for ill.
None of this was by design, of course, and the most important lesson to take from Big Bang is to beware of unintended consequences. At the time of the reforms, the government had little idea where they would lead. One minister thought it “very important that the Stock Exchange and the majority of the institutions here should remain very firmly in British hands”.
Robin Leigh-Pemberton, then governor of the Bank of England “would not contemplate with equanimity a Stock Exchange in which British-owned member firms played a subordinate role”. But in the decade after Big Bang not a single sizeable British investment bank challenged the Americans. Wall Street’s cut-throat ways rapidly became the norm.
That the City thrived in spite of this is partly down to luck. The growth of the emerging markets meant its position midway between the Asian and American time zones was crucial. The dominance of the US investment banks in London ensured that English became the global business language. The City’s long heritage gave it an infrastructure of supporting industries and a robust legal structure at an opportune moment. London was in the right place with the right skills at the right time.
Big Bang helped to bank these blessings but let us not confuse serendipity with genius, nor trust to luck again. Three of the extraneous factors that have favoured the City in the past three decades look less favourable now.
First, the development of mature financial institutions in the emerging markets with their own infrastructure will reduce the importance of trading in a neutral timezone — a business on which London has thrived.
This is exacerbated by the second factor: the potential of technology to reduce the importance of intermediary functions as financial institutions and their customers learn to trade among themselves.
Third, and most important, Brexit, is likely to challenge not just the UK’s relationship with its continental trading partners but also London’s status as the natural European headquarters for international companies. Some business will dribble to Paris and Frankfurt, New York will doubtless reassert its status as the global financial capital and added impetus will be given to the repatriation of business services to Asia.
These are not life threatening to London but the shift in fortunes does call for a measured policy response and Brexit is the key. Leaving the EU poses a risk to some of the City’s activities but it also offers an opportunity for the UK to shape its own financial destiny. It is important that this does not become a race to the bottom. Let us treat is as a chance to reassert the advantages of a mature professional services industry in a stable political environment.
Now is not the time to lob another brick or to wait to see what happens. If ever there was a need for a considered financial services strategy rather than another Big Bang, this is surely it.