My article for Financial World on the Big Bang

Big Bang made the rise and rise of London’s financial sector possible. A club of largely English gentlemen was transformed into a major global financial market. The old City stockbroking firms and their merchant bank clients had many talented people, but they were constrained by a lack of capital, by a concentration on UK activity, and by the protectionist rules of the market. The brokers did not compete on price, as tariffs were fixed for all. What competition there was occurred over research and levels of service. The merchant banks punched above their weight and sought to harness the much bigger investing and placing power of the commercial banks, without themselves having market making capital and opportunity. The market enforced separation of function, with jobbers making the market and running book positions, brokers acting for clients and seeking best prices, and merchant banks and investment management houses providing advice to the retail and corporate users of the stock and bond markets.

The vision I helped the government form was of a much larger, more responsive, more competitive marketplace. Opening up the market to new competitors meant welcoming in much bigger companies with access to large sums of capital. Markets could become more liquid. Removing the fixed tariffs and fixed roles allowed innovation and price cutting, offering a wide range of services at keener fee and commission levels. US, Japanese and other leading banks and investment houses from around the world wanted a presence in London or wanted a much bigger activity to utilise the new freedoms. Quite a few of the smaller UK businesses decided to sell out to larger players. Even the merchant banks often decided on tie ups with larger partners to get access to the huge sums of capital the new markets needed, and to do the big deals for the multinationals that had been beyond their balance sheet reach before.

The new freedoms brought demands for new regulations. The old city, as a club of like minded people with similar training and backgrounds, had relied largely on self regulation. Everyone was taught that “My word is my bond” and all were expected to behave to decent standards by other club members. Registered stockbrokers, jobbers and merchant bankers knew the measure of each other and of the competing firms. The club had ways of dealing with the few who transgressed against the club ethics and rules. Once the market was opened to many firms of varying cultures and backgrounds, and to so many more players, it became necessary to have longer rule books and more formal procedures for ensuring compliance. London began the long march to Statutory regulation and then to EU regulation that has characterised the last three decades.

At the same time as we lifted the restrictions on City activity we deregulated telecoms and put in a challenger to the monopolist. I saw this as a crucial component of helping build a bigger City. This was also an important planned part of the move to create a first rate global market. BT as a nationalised industry was struggling to keep up with the growing demand for capacity and sophisticated telecom based data services to allow the City to expand. It took the liberalisation to deliver that too, just in time for the explosion of talent and capital that has characterised the rise of London ever since.

1 Comment

  1. Antisthenes
    March 31, 2016

    A text book example of liberalising markets the results often spectacular. It does not come without a price so regulation is needed to keep participants honest and to keep abuses at bay. Even a complete libertarian like me understands that. When liberalisation starts regulations are put in place but not all eventualities are catered for understandably. So a proper monitoring system is needed to adjust the regulations as events unfold.

    However when the wrong people are put in charge to do that monitoring as often happens because it is politicians who decide who those people are and what system of monitoring they employ then much goes wrong. Then the the monitors and their masters hide their lack of due diligence by pointing accusing fingers at their chosen scapegoat usually those whose behaviour it was their duty to control and through their own incompetence did not.

    Of course everyone then has to get into the act especially those who are against liberalisation in the first place, not forgetting the envious and the meddling hands of the bureaucrats all wanting draconian and punitive regulations reintroduced. So ending back at square one where the restrictive chains are put back on the so results are no longer spectacular.

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