Nick King is a Research Fellow at the Centre for Policy Studies
When Rishi Sunak was recently asked whether the UK’s departure from the European Union meant we should revisit the “Big Bang Playbook“ for the City of London, what choice was there but to agree? After all, what self-respecting Chancellor of the Exchequer could say anything else when such an enticing proposition is dangled in front of them by a newspaper editor (in this case, )?
But the world we’re living in is not that of the mid-80s. The EU, for all its faults, does not have the equivalent of the Restrictive Practices Act which – another political hero of the Chancellor’s – worked so hard to overturn. The idea of another “Big Bang moment“, the kind of sudden, overnight liberation which occurred on October 27, 1986, is unlikely to materialise.
But that doesn’t mean that there isn’t huge scope to use Brexit to boost the City, and the British economy – especially if we learn the right lessons from those Thatcher-era reforms.
As well as sweeping away anachronistic, inefficient practices, the Big Bang served to introduce three vital new operating principles to the City of London, turning it from a relatively sleepy, parochial industry into a global powerhouse. Those principles remain as valid today as they were in the 1980s.
The first was to open the City up to the world. For generations, the institutions of the City had been highly clubbable places, populated mainly by members of the British establishment. The Big Bang introduced competition – and global competition at that – which led to drastic changes in attitude and performance. In time, that led to London becoming one of the important financial hubs in the world alongside New York, in either first or second place for insurance, investment banking, asset management, FX trading and more.
Some worry that leaving the EU risks this preeminence. Certainly, ever since the Brexit vote, it has been clear that Paris, Amsterdam and Frankfurt (among others) have had more than one eye on the opportunity to knock London off its perch. Fortunately, for all the reports of going, the impacts thus far have been limited. As one industry player put it to me, “not even the Germans want to go to Frankfurt“.
But the ability to access, and deploy, capital across the continent is clearly vital, and jeopardised by the fact we have left the European Single Market without a deal on services. It certainly does not make sense for the City to be regulated by Europe: given the relative size of our financial services industries, that would be the tail wagging the dog. But the Chancellor and the Treasury need to negotiate a Memorandum of Understanding that allows us to continue to operate in, and cooperate with, the EU as soon as possible.
Yet we must also turn that challenge into an opportunity – to not just maintain but enhance the UK’s status as a global centre for capital and financial services.
Our equity markets are already some of the deepest in the world. But we need to remain world-class and be able to finance the industries of tomorrow. The , being undertaken by Lord Hill, is fully focused on achieving precisely that by making the regime more competitive.
Already that the UK investment management industry manages some £10 trillion of assets. But again, we need to work harder to attract more capital from South America, the Middle East and South East Asia.
Attracting more capital – and talent – while continuing to build our reputation as a global centre for financial services should a central pillar of the Global Britain agenda.
The second principle from the Big Bang is proportionate regulation. Just as those reforms were predicated on, and driven by, “regulation that works“, we now need to make sure that our regulatory regime is one which supports rather than stifles our financial services industry – and which is tailored to our needs.
Coming out of the Single Market there are few voices clamouring for a bonfire of regulations in financial services. But at the same time, there is no point in sticking rigidly to a set of rules which don’t necessarily work for us or our markets. on this site have, rightly, pointed to changes which should be made around the Alternative Investment Fund Managers Directive and the Markets in Financial Instruments Directive II. The collapse of the financial advice industry, in particular, has been entirely been driven by overzealous, anti-competitive regulation.
Another set of regulations we should put in the crosshairs are the Basel capital requirements, which can treat a small bank or a building society in the same way as a large investment bank – which also damages competition by making it much harder for the new challenger banks to compete. By taking a more proportionate approach, and freeing up domestic lenders’ capital, UK regulators can create a more competitive market and immediately unlock more funding for domestic priorities like sustainability, net zero and levelling up. It is also striking that Britain’s regulators rarely have a duty to consider the growth impacts of their decisions: , we do not want the financial services industry to have the stability of the graveyard.
Proportionate regulation is linked to the third pillar that drove the Big Bang’s success: our absolute reliance on innovation. The reforms of the Thatcher era brought in new players, new instruments and new ways of doing things. That same willingness to embrace innovation is imperative if we are to thrive in the future.
Today, despite our world-leading fintech industry, much of the pioneering innovation in financial services happens in Singapore, Shanghai and other Asian markets. Industry insiders claim that “an abundance of caution prevails” at the FCA. For all the successes of its innovation “sandbox” (a concept some claim was forced on it by Osborne), it is still not doing enough to support innovation or to open up new markets. These are issues I have but those in the fintech industry tell me FCA authorisation still takes too long.
The tone for the regulators is set by the Treasury, of course – and the Treasury needs to back innovation now like never before. It must ensure its regulators lose the “gold plating” mentality of old, which has put us at a competitive disadvantage, and use the Future Regulatory Framework Review to help us capture the global opportunities which abound.
The fundamentals of our financial services industry remain strong, as the Chancellor himself said, but they cannot be taken for granted. Despite the fact we are blessed in our language, timezone, history and rule of law, the forces of competition are ever stronger – on the continent and beyond. To maintain London and the UK’s preeminent status will take hard work and determination.
And that, I would argue, is the most important lesson of the Big Bang. The new entrants, innovation and subsequent global success came about because we had a government that was ready to back the industry as required. It was a Government that recognised that financial services, the profit motive and shareholder interest were fundamental goods – and spoke out on their behalf.
We might not be in line for another Big Bang but to help us make the most of Brexit we need the Government to be pro-business, pro-City and to offer financial services enduring political support. If those principles are in the Chancellor’s “Big Bank Playbook”, then sign me up.