London was the premier financial center in the world in the 19th and early 20th century. This status seemed lost for sure when New York and Tokyo gained share at different points of the 20th century. Indeed, forty or fifty years ago, the prospect of London regaining its past preeminence seemed a remote possibility, if it was even a possibility at all. Still, the city has recovered much, maybe even most, of its former glory. This happened despite Britain’s shrinking share of world GDP and the much-reduced importance of its currency in world trade and finance. A regulatory overhaul in the 1980s and the subsequent ‘Wimbledon effect’ in London finance goes a long way to explaining how this happened.
Before Reform
Before the mid-1980s, London had ceased to be the most important financial center in the world, having lost ground to New York and Tokyo in the preceding decades. Still, the city retained experienced financiers and possessed a dominant position in some important niches, such as the Eurodollar market, the market for U.S. dollar deposits held outside the United States.
Nevertheless, other parts of Britain’s financial system had become a backwater. Even well into the 1980s, the London Stock Exchange had not kept up with the times. The exchange still enforced fixed minimum commissions. However, this and other restrictive practices came under government scrutiny, prompting reform. It was needed, the London Stock Exchange looked like an antique; at the exchange, waiters still watered the floors with watering cans to keep the dust down and off the suits of the exchange’s members.
The London Stock Exchange also maintained a strict separation between brokers, who were client-facing, and jobbers, the traders and dealers who could actually deliver a security to a buyer. Neither could be part of any larger financial firm. Also, foreigners were excluded from membership of the exchange. So long as these rules remained in place, London risked losing even more ground in the competition between securities markets.
Thus, the London Stock Exchange was under pleasure to change, and the pressure was not coming from the government of Margret Thatcher alone. The impetus for reform also came from the judicial system, specifically the Restrictive Practices Court which was charged with dispensing justice on matters of anti-competitive behaviors such as those which the exchange had hitherto gladly maintained. Signaling further trouble, a competing exchange opened in 1982, the London International Financial Futures and Options Exchange, with early success.
Big Bang
The government and the London Stock Exchange agreed to implement sweeping changes to the existing system, and to do so overnight. The date of October 27, 1986 was selected; the sudden event has been known since as the ‘Big Bang’. The fixed commissions were abolished, the prohibition on the combination of brokers and jobbers vanished, and the unwelcoming stance towards foreign firms was extinguished. The measures brought the banking sector and securities industry closer together. Trading moved from the physical into the digital realm and trading volumes rose almost immediately.
Besides the Big Bang, several other reforms of the financial-regulatory system were undertaken in the 1970s and 1980s. Regulation generally was lightened and new regulations would be crafted with more input from the financial industry.
While competent, the United Kingdom’s Financial Services Authority was judged to be more flexible, industry-friendly, and predictable than regulators elsewhere, including in the United States where several federal and state-level regulators shared responsibility for certain areas without a common agreement on policy.
Further, the legal factors and business practices driving the separation of commercial banks, investment banks, and building societies were being loosened and the currency controls that prevented international competition were lifted. On this point, it is worth mentioning that the reforms came at a time of globalization, which offered more incremental opportunity to London than New York. No longer did the size of a country’s economy or the relevance of its currency matter to a financial center’s ability to grow.
Wimbledon Effect
After the Big Bang and the other reforms of that era, foreign firms entered the London financial markets and British firms came under foreign control. Foreign bankers also came to London, many starting their career there, benefiting from Britain’s relatively liberal immigration rules for skilled people.
As for firms, of the three hundred members of the London Stock Exchange before the reforms, all were British; within a year after the Big Bang, seventy-five of them were foreign-owned. Those that remained independent were required to enter new niches to compete with, or avoid competition with, the global firms, increasing the sector’s differentiation and the array of services on offer in Britain’s banking and securities industry.
It was said the Big Bang created 1,500 millionaires as small partnerships were bought for large sums. Once acquired, often by foreign firms, many of the companies ceased to exist as unique entities. This was an unintended, and at least initially an undesired, consequence; the Bank of England had been trying to encourage British firms to merge with each other to maintain the presence of large British-owned firms in London. Still, this proved not to be a problem.
London has actually been a beneficiary of what has been called the ‘Wimbledon effect’. In addition to a global financial center, London hosts the Wimbledon Championships, a global tennis tournament that, until Andy Murray in 2013, had not produced a British men’s singles winner in over seventy-five years. The relative strength of British tennis athletes seems to matter little to Wimbledon’s relevance.
It turns out hosting the world’s best of anything attracts people, or firms, from abroad and accepting the foreigners helps keep you on top. Compared to New York, Tokyo, or Frankfurt, London’s position is vastly disproportionate to its country’s share of economic activity just as the prestige of a Wimbledon trophy seems wholly disconnected with the success of British tennis stars.
More than twenty years after the Big Bang, 251 foreign banks had branches or subsidiaries in London and foreign banks made up most of Britain’s banking assets. Further, a third of the £4.8 trillion in fund assets in Britain are managed there on behalf of foreigners. Britain remained the site of 40% of world currency trading, twice the portion of New York and Tokyo combined, and had a market share of 46% in over-the-counter derivatives. Foreign firms contribute much to this activity. Germany’s Deutsche Bank, as just one example, would conduct most of its trading from London where it employed 8,000 people, rather than in Frankfurt.
Durable Advantage
It is much easier to retain primacy than to gain it. Nonetheless, high-income taxes, new regulations, proposed curbs on immigration, the increased importance of finance in faraway Asia, and Britain’s exit from the European Union, have all threatened London in the last fifteen years or so. Still, the city’s primacy in finance is supported by the global use of English, its respected commercial law, its experienced financiers, its openness, and the array of complementary services offered in the city. As at Wimbledon, London provides the venue but the world provides much of its audience and talent.
Lesson
Owing to a regulatory overhaul and the institutions and expertise that had survived there since its heyday, London managed to return to a preeminent position as a financial center. This could not have been achieved without the ‘Wimbledon effect’. Indeed, one of the ways that globalization changed the world was by allowing the best locations for a given activity to thrive independent of their geographies. London may no longer be the capital city of the world’s largest economy or located at the crossroads of global trade, as it once was. Still, it can punch above its country’s weight in financial services.
More from the Tontine Coffee-House
Read about the contributions of Sir Thomas Gresham to London’s financial history and how London merchant-banking firms financed world trade. Consider subscribing to this blog’s newsletter here.
Further Reading
1. Big Bang 20 Years on: New Challenges Facing the Financial Services Sector: Collected Essays: With A Foreword by Nigel Lawson, The Centre for Policy Studies, London, 2006.
2. Bowen, Alex, et al. “The Recent Evolution of the UK Banking Industry and Some Implications for Financial Stability.” Bank for International Settlements, 1999.
3. Church, Adam. “The Rise-and-Fall of Leading International Financial Centers: Factors and Application.” Michigan Business & Entrepreneurial Law Review, vol. 7, no. 2, 2018, pp. 283–340.
4. “Death by a Thousand Cuts.” The Economist, 7 Jan. 2012.
5. Robertson, Jamie. How the Big Bang Changed the City of London for Ever. BBC, 26 Oct. 2016.
