THERE is a myth gaining traction that Margaret Thatcher’s deregulation of the City through the Big Bang in 1986 ultimately led to the crash of 2008. This is part of the reductionist approach of much of the left-leaning commentariat. The reasoning seems to go: something terrible happened in 2008; Thatcher was terrible; therefore the actions she took in 1986 must have led to the crash 22 years later.
Let’s be absolutely clear: in general, the 1980s was not a period of financial deregulation. Insider trading was made illegal in 1980. The life insurance industry, which had been almost free of regulation for over 100 years from 1870, was re-regulated from 1980 to 1982. Bank deposit insurance was introduced in 1979. The sale of investment and insurance products came under statutory regulation from 1986. Further, the first ever regulation of UK bank capital took place under Basel I, agreed while Thatcher was Prime Minister.
It certainly could be argued that this increase in regulation made the financial sector more opaque, created moral hazard and made a crash more likely. Though this is probably not what Thatcher’s critics have in mind.
But was this not all outweighed by the “Big Bang” and the deregulation of investment markets in 1986? At the time of the Big Bang, I was horrified that it would be impossible to have anything to do with investment products and markets without being regulated by a group of bodies accountable to the state. The concentration of power was frightening. What would happen if things went wrong? This concentration of power was exacerbated by Gordon Brown when he created the FSA.
That said, the Big Bang did lead to a revolution in the types of firms that were permitted to operate in financial markets. For example, combined broking, research and trading operations were permitted. This was deregulation and certainly changed the face of the City. Out went unlimited liability and partnerships, and in came integrated investment banks, like Goldman Sachs, providing the range of services that we see today. In 25 years, the UK’s trade surplus in financial services increased two-and-a-half fold, and there is now no credible rival in Europe for the City’s position.
In many senses the City did become more efficient, and efficiency was further enhanced by the abolition of exchange controls. This allowed the City to become a truly international centre again, as it had been before the Second World War. Thatcher further improved the City’s ability to compete by reforming corporation tax, and by lowering the top rate of income tax from 83 per cent to 40 per cent.
In 25 years, the UK's trade surplus in financial services has risen by two and a half times
But those who see the 1980s as being a time of unalloyed deregulation not only ignore the new regulations that hit the financial sector in that period, but also misunderstand the nature of the Big Bang itself.
In short, the Big Bang transferred regulatory responsibility from institutions that developed within markets – which were independent and private institutions – to the state. The market was more heavily regulated before the Big Bang, but it was through private regulatory associations rather like the Football Association. You could deal in investments outside the stock exchange, just as you can set up a football club that is not affiliated to the Football Association. But you did so at your own risk.
Many who believe in free markets supported the Big Bang and the deregulation that came with it because they believed it would create a more efficient financial sector. But we should be more nuanced in our reaction. Private regulatory institutions and all they implied, such as the separation of broking and trading activities and the prevalence of unlimited liability, had stood the test of time and perhaps could have reformed themselves in a more evolutionary way without a Big Bang.
So, two things are clear when it comes to Thatcher’s legacy. In many respects she increased regulation of the financial sector in ways previous governments had not considered. Secondly, the most important feature of the Big Bang was that it took regulatory responsibility away from the markets and gave it to the state. In this area Thatcher was a pragmatist, not an unalloyed free market supporter. If these policies led to the crisis, those on the left have some thinking to do.
Philip Booth is editorial and programme director at the Institute of Economic Affairs, and professor of insurance and risk management at Cass Business School.