Former prime minister Margaret Thatcher left behind many legacies. Some revere her, others revile her. But, 25 years since the Thatcher government introduced a package of new rules for the financial services industry, known as the Big Bang, the jury is still out on whether deregulation helped or hindered the City.
Before the Big Bang, the Square Mile was dramatically different to today. All 300 members of the London Stock Exchange (LSE) were domestic firms with long-established British pedigrees. There were strict distinctions between stockbrokers, financial advisers, and stockjobbers (firms that acted as intermediaries between stockbrokers) and stocks were traded by “open outcry” at the old exchange on Throgmorton Street. Some say the culture in the City at that time was excessively elitist and exclusive, with career progression dependent on who, not what, you knew.
But overregulation in the financial sector that was threatening London’s global competitiveness, and investment in City firms, needed to be stimulated to help London once again become one of the world’s preeminent financial centres. So on October 27, 1986, the Conservative government introduced a sweeping programme of deregulation.
The legislation scrapped fixed commission rates, resulting in a more competitive environment. It also got rid of the barrier between stockbrokers and stockjobbers, paving the way for integrated investment banks. It abolished rules that barred foreign companies from buying City firms – today 65 per cent of the City’s workforce has a non-British employer. And it swapped exchange floor trading for screen-based computer trading, creating a modernised and more efficient market. In short, the Big Bang gave birth to investment banking, and the City as we know it today.
But is the financial sector better for deregulation? Opening the City to foreign firms meant that small British brokers were snapped up by some of the American, Swiss, Dutch and Japanese names we’re familiar with today. Although it signalled the end of an era for traditional British firms, foreign acquisitions brought an influx of capital, which both pushed up wages and strengthened London against its global competitors. The relaxed rules attracted American banks in particular, such as Goldman Sachs, which introduced a more meritocratic and hardworking culture to the Square Mile. What’s more, the removal of the fixed commission and the establishment of full service investment banks made trading cheaper and easier, thereby pushing up the volume of trades. Deregulation, therefore, paved the way for London to become one of the world’s strongest financial centres, leading the market in cross-border bank lending and interest-rate derivatives, and accounting for two fifths of global turnover in foreign exchange, according to lobby group, CityUK.
However, the introduction of integrated investment banks has led to a conflicts of interests within many investment banks, since they both advise companies on deals, and market financial products to investors. And many blame the “bonus culture” imported to the City from the US in the wake of the Big Bang for encouraging the high risk trading activities that led to the financial crisis.
The Big Bang was a dramatic transformation but, 25 years on, we’re perhaps closer to achieving the right balance between competitiveness and regulation. Welcoming international investment in the City has been a critical step in strengthening London’s financial sector and turning it into one of the foremost global centres in the industry. And although they do not repeal the Big Bang, the forthcoming reforms set out by the recent Vickers report should re-impose a necessary measure of regulatory control.