TWENTY years ago next Friday a cosy, old-fashioned gentlemen’s club in London EC2 reluctantly altered its rulebook. Put like that, it doesn’t sound very explosive, but the club was the Stock Exchange and the reforms paved the way for profound financial and cultural changes in the City and the country.
From the death of the boozy business lunch to the sprouting of vast towers at Canary Wharf and the emergence of a new polyglot professional elite in London, the impact of Big Bang — a term first adopted by a City editor of The Times, the late Kenneth Fleet, — is there for all to see.
The perfomance-related bonus culture, which has spread to all corners of British commerce, can be laid in part at the door of Big Bang. So can longer working hours, business breakfasts, £10 million Mayfair townhouses and even the fashion for open-necked shirts.
Above all else, Big Bang is seen to have helped to unleash colossal quantities of new wealth, and not only for a few tens of thousands in London. Through taxes and spending, the boost has been more widely enjoyed. According to Doug McWilliams, chief executive of the Centre for Economic and Business Research: “The City today pays Britain’s way in the world. That wouldn’t have been possible had we not had Big Bang. The man on the street in Hartlepool is a hell of a lot better off than he would otherwise have been.”
Mr McWilliams argues that without Big Bang, the City would have been turned into an international financial backwater. After the damage from the economic downturn of the late 1980s, the dot-com collapse a decade later could have been terminal.
Today the thriving City produces a net £65 billion boost to the balance of payments and, without that, the country would long since have succumbed to a trade deficit crisis. That, in turn, would have led to slower economic growth and higher unemployment.
It may be pushing things a bit to suggest that we owe our very jobs to Sir Nicholas Goodison, the Stock Exchange chairman at the time, and Cecil Parkinson, the Trade and Industry Secretary, who together pushed the button on Big Bang.
Some argue that Big Bang was merely the latest in a long line of reforms liberating the City, the most important being the abolition of exchange controls in 1979. Edward Whitley, a former Cazenove broker who runs International Financial Services, London, the promotional body for the City, says: “Big Bang was a very important step, but it should be seen in the context of a longer history of openness in UK financial markets. Our regulators have traditionally been against vested interests and the protectionism favoured in some other markets. The first big event to benefit London was in 1963, when US interest equalisation tax led to the beginning of the London-based eurodollar market. Another smaller, but often forgotten, change was the lifting of the ceiling of 20 partners in law firms in 1967. Five out of the ten largest firms in the world are now UK based.”
Symbolically, however, Big Bang has come to be seen as the moment when the tempo of the City sped up and its culture changed irreversibly. It is usually seen as a Thatcherite reform, every bit as radical as the anti-union legislation pushed through at the same time. As Lord Parkinson remarks on the facing page, Mrs Thatcher disliked closed shops, and the Square Mile was full of them.
In fact, however, the roots of Big Bang go back to the 1970s, when Labour extended restrictive practices legislation from goods to services, including financial services. The Office of Fair Trading (OFT) decided to challenge the Stock Exchange in the courts over its numerous clubby rules and regulations.
For years the OFT locked horns with the Stock Exchange, and for years the more conservative members of the Exchange fought a highly effective rearguard action, blocking any attempt to liberalise the club, which was riddled with anticompetitive practices, including fixed commissions and strict rules preventing outsiders getting in.
London was losing its way as one of the great financial centres. More shares in British blue chips, such as ICI, were traded in New York than in London. As John Kemp-Welch, a subsequent Stock Exchange chairman remarked, “London had very much gone into a siding.”
Soon after the Tories were re-elected in 1983, matters came to a head when the judge set a date for a hearing. The Government decided to act, and Lord Parkinson quickly agreed an out-of-court deal with Sir Nicholas. Out were to go those fixed commissions, out would go the elaborate “single capacity” system of jobbers and brokers, out would go the rules preventing deep-pocketed foreigners buying broking firms. Three years later the changes came into force, the reverberations all the more profound because of the parallel development of an electronic share-trading system and an entirely new system of City regulation.
Within days of Big Bang, the old Stock Exchange trading floor was deserted. Meanwhile, the reforms unleashed a frenzy of takeovers and mergers, as British, US and continental banks rushed to buy a place at the City table. With hindsight, most wasted their money. The winners today are the banks — Goldman Sachs, Morgan Stanley — that built organically rather than by acquisition. But scores of partners in traditional broking firms were able to bow out rich.
For a while things turned sour in the City, though not because of Big Bang. The Guinness share support scandal erupted. Geoffrey Collier, a senior broker, was fined £25,000 for insider dealing. And soon after came the 1987 stock market crash, when £60 billion was wiped from UK share values in a matter of hours.
But the benefits of Big Bang gradually started to bear fruit. Competition helped to bring down the costs of share dealing. Fresh capital helped the banks to invest in new technology and new products. The abolition of single capacity paved the way for the large integrated securities houses we see today, exploiting scale economies and global sales power.
A more meritocratic culture attracted real talent and sidelined the mediocre and idle. London has re-established itself as one of the world’s two pre-eminent capital market centres, alongside New York. There have been costs. The City is a chillier place, with little or no loyalty between staff and employer. Paternalism has disappeared. The stars go where they can secure the biggest bonuses.
David Freud, who saw it all as a senior figure in S G Warburg, now part of UBS, laments the disappearance of “civilised working hours” and the dismantling of the collegiate world. “Out went the doorman who welcomed everyone by name; in came the turnstile and the swipe card,” he says.
The “Wimbledonisation” of the City is another frequently voiced criticism. London merely provides the venue for foreign-owned investment banks to make hay. The dividends, although not the staff pay cheques, are repatriated. This complaint will only really be tested come the next serious financial services slump.
The rise of huge securities houses has also raised serious questions because of the numerous conflicts of interest that they have to manage. According to Lord Parkinson, who set the ball rolling 23 years ago: “I do have some reservations. I think some of the big investment banks are trying to do too many things. Their Chinese walls are under tremendous strain.”
Then there is the sheer disparity in who wins the spoils. Three thousand people in the City are estimated to have received bonuses of £1 million or more last year. Big Bang has spawned a plutocracy, and the envy, greed and sense of grievance are almost palpable as the bonus season reaches its apogee in December and January. Banks want to reward the real “rainmakers”. Bigger and bigger sums are going to fewer and fewer people.
“It’s a much less evenly spread prosperity today,” Mr McWilliams says. “It’s more like sport or fashion, where the winner takes all. It’s the nature of the beast, but we’re surely better off than if the beast didn’t exist.”
THE MAIN CHANGES
Introduction of a new regulatory system through the Financial Services Act 1986
