October 27, 2011, 12:17am
SOMETHING had to happen. London had once been the world’s major financial centre, but by the 1980s it had been overtaken by New York and that lead was growing. The City remained an old-fashioned world: to outsiders like me, more like a private gentlemen’s club than a place of business. Its leading players were sleepy, upper-crust partnerships who could not have taken up the challenge of globalised trading even if they had wanted to.
There were bizarre rituals and job discrimination. An open outcry system, which computers and other forms of new communications technology were already making redundant. An inexplicable division between jobbers and brokers, maintained – like the fixed commissions of the time – by an insider cartel.
The Thatcher government saw no reason why all this should be maintained by UK regulation. It believed in competition and markets as the mainspring of economic progress and the best way to drive down the costs and drive up the quality of goods and services for the public. Financial services were no different.
While she saw it as just one part of deregulating the sclerotic UK economy, the Big Bang became crucial to Thatcher’s economic strategy. The whole privatisation programme could not have been managed by the old order.
That was obvious during the privatisation of British Telecom in 1984. Only a few thousand people in the UK owned shares. Downing Street aides figured that, to sell an £8bn company like BT, people would need educating. They visited the stock exchange to discuss circulating a leaflet. The stock exchange folk suggested printing perhaps 5,000. It was shockingly complacent: the government side had in mind a first run of 1,000,000 – with more to follow.
It is because of Big Bang, and the privatisation that it was able to bear, that we now have not thousands, but millions of shareholders with a real stake in the UK. That led to a huge change in attitudes towards business, and turned us, for the first time, into a capital-owning democracy.
Meanwhile, London bounced back as the world’s top financial centre. True, many City firms were snapped up by foreign firms, including many Americans who enjoyed looser regulation here than in the US. But the key for any industry, not just finance, is not who owns it but where the jobs and value are being created. Big Bang ensured the answer was – London.
Some say the deregulation allowed things like the Barings collapse – a whole bank ruined by one rogue trader. But even after the Big Bang, Barings, with its huge momentum, remained one of the old-boy, family run banks. Bad governance, not deregulation, brought it down.
People say Big Bang created a “loadsamoney” culture that persists today. No. It simply allowed more people to exploit new opportunities and profit from them. Computerisation, which came in simultaneously, massively multiplied the productivity of all that new business, and salaries and profits reflected that efficiency surge.
Others argue the money culture encouraged us all to borrow and got us into our present difficulties. It’s a bit much to blame that on a deregulation 25 years ago. The critics should look instead to high-spending, over-borrowing, note-printing, easy money government policies and implicit government guarantees to find the explanation for that.
Dr Eamonn Butler is director of the Adam Smith Institute.
ON THIS day in 1986 the way in which shares were traded in the UK was changed. In particular, there were no longer any fixed commissions for share trading and brokers and market makers were allowed to combine in so-called dual capacity firms.
Prior to Big Bang commissions on dealing were fixed: all brokers charged the same rate of commission and did not compete. Investors could therefore not shop around and get the best deal. But at least investors were protected in the sense that the brokers’ relationship with the jobbers was an adversarial one – the broker would try to get the best price obtainable from the jobber when dealing.
This structure had made London increasingly uncompetitive as a venue for share trading, particularly when compared with New York which had its own version of Big Bang, known as May Day as it happened on 1 May 1975 when it scrapped fixed commissions. Trading in large international company shares had begun to migrate to New York because investors could deal more cheaply there.
In my view Big Bang was a colossal mistake. The basic motivation for it was correct. Fixed commissions were a barrier to competition and London was losing out as a centre for share trading as a result. But its architects made an incorrect assumption. They correctly foresaw that an end to fixed commissions would lead to a radical cut in commission rates. But they went on to reason that this fall in commission rates would render stockbroking unprofitable. As a result they accepted a quid pro quo that brokers should be allowed to combine with jobbers (to use the jargon, they should switch from being single capacity firms which either did broking or jobbing to dual capacity firms which did both).
These Big Bang changes introduced insuperable conflicts of interest. No longer were investors protected by a broker acting as their agent and trying to get them the best price. Instead they were dealing with integrated firms which maximised profits by giving investors the worst deal they could as they were principals on the other side of every transaction. And these were not the only conflicts of interest which arose from Big Bang. Integrated securities businesses also provided merger and acquisition advice to companies – formerly the domain of merchant banks – as well as providing research on those companies’ shares for investors in those shares, trading in those shares as principals and raising equity or lending money to fund the deals. The potential for profit at the expense of investors as a result were manifold.
These conflicts are supposedly policed by so-called Chinese Walls which keep these functions separate within banks but the long line of scandals on both sides of the Atlantic in the securities markets over the past two decades show that this has unsurprisingly proven to be ineffective. A regulatory concept like Chinese Walls is no match for greed.
It may seem inconceivable that any of the Big Bang reforms will ever be repealed but until they are I think we will be condemned to suffer the sort of mistakes, malpractice and calamities which helped to cause the current financial crisis.
I have changed my mind about Big Bang as a result of the events of the credit crisis. As John Maynard Keynes famously remarked: “When the facts change, I change my mind.”
Terry Smith is the chief executive of Tullett Prebon.