The day Big Bang blasted the old boys into oblivion
Twenty years ago, the City entered the modern world. Out went parochialism and long lunches at the club; in came American banks, electronic trading and the cut-throat competitive ethos that has put London at the heart of international finance
Sunday 29 October 2006
The mood at Mansion House on Thursday night was one of celebration. Veterans of the City of London turned out in force to mark the 20th anniversary of Big Bang - the event which began the capital's transformation into a modern global financial powerhouse.
The man they had all turned out to hear was Sir Nicholas Goodison, the former chairman of the London Stock Exchange. Back in 1983, Sir Nicholas and Cecil Parkinson, the Trade and Industry Secretary, began to draw up a new regulatory framework which brought electronic trading to the City and instantly did away with face-to-face share deals and restrictions on equity dealing.
The new regime came into force in 1986, and since then the City has been transformed: the value of traded shares has increased by 1,500 per cent, from £161bn in 1986 to £2,496bn, while banking sector assets have increased by a factor of seven to £5,500bn. The Treasury pulls in more than a quarter, 26 per cent, of its annual corporate tax receipts from the financial services industry, up from just 18 per cent before the new rules were introduced.
In his address on Thursday, Sir Nicholas said he had been surprised by the extent to which so many of the old brokerages and merchant banks had been subsumed, never to resurface. Some retain a bit of nostalgia about the City's journey from being a stodgy domestic market to a vibrant hub of global finance.
"Clients are more suspicious of the banks," says one banker. "There is more conflict and the banks are making more money. People worry about whether they have a [private equity] angle, or a hedge fund angle. There was very much of a client service ethic in the old City. That is gone."
In the aftermath of Big Bang, in October 1986, Martin Smith, the co-founder of corporate finance firm Phoenix Securities and current deputy chairman of New Star Asset Management, was suddenly a very busy man. By his estimate, Phoenix sold no less than 20 of the City's traditional brokers to ravenous overseas banks, mainly American, which rushed across the Atlantic after the new regulations came into effect.
The package of reforms that came to be known as Big Bang did a few things. For one, it broke down the barrier that until then kept brokers, who traded shares on behalf of their clients, and jobbers, the market makers, separate. It also eliminated fixed commissions, and it allowed foreign ownership of UK brokers for the first time.
After years of being kept at bay by an anachronistic old boys' network, foreign interlopers, armed with sacks of cash, were now free to take over some of the most hallowed of City institutions. UK retail banks, meanwhile, were free to set up integrated investment banking operations for the first time. Face-to-face trading was rendered obsolete with the switch to dealing-rooms filled with electronic screens, which greatly increased the efficiency of the market.
The new reality bore no resemblance to the cosy, clubby ways of the pre-1986 City. "It was like night and day," says Mr Smith.
To illustrate, he tells the story of a senior partner at Wedd Durlacher Mordaunt, the City's most successful jobber at the time. Salomon Brothers, the famously aggressive US bank, wanted an in to the London market. It had expressed keen interest in Durlacher, so Mr Smith thought it a good idea to bring senior Durlacher partners to the US to meet the New Yorkers. Yet one of the most senior men had a problem: he had never left the country and didn't have a passport. "That really summed up the City then," Mr Smith says. "That a manager at that level had never left Britain seems quite inconceivable now."
Twenty years on, the once-insular City of London has been transformed. In many ways, it is unrecognisable from what it was then. Growth has been tremendous, as the figures above suggest. The hours are longer, the lunches shorter, the workforce global, the pay better. Competition among integrated banks to provide a range of services to corporate clients is fierce, and loyalty from both employee and employer has all but disappeared.
As the old houses were picked off one by one, the opaque partnership structures that ruled the City fell away. That made it easier to move between firms and pay went up. "People could look over their shoulders for the first time and see what others were getting paid. It became much more open," says Pablo Guerra of Glocap, a financial services executive search firm.
The balance of power has also shifted. Hedge funds and private equity firms - essentially non-existent in pre-Bang London - now have astronomical amounts of money at their disposal for ever more audacious takeovers or to buy stakes in companies to agitate for change. The takeover or dismantling of a FTSE 100 company by a private equity firm is now common. As one banker says: "There are no more sacred cows now."
This is not all due to the framework that Sir Nicholas and Mr Parkinson drew up. Pressure for a shake-up had been growing for years. Globalisation was already gaining steam, and foreign capital was seeping into London. That brought with it demands for greater openness and fairness at the stock exchange, where seats were still being swapped over boozy lunches.
"We behaved like back woodsmen of the financial world at the time," said Andy Stewart, who was then a partner at Simon & Coates, which was bought out by Chase Manhattan, the US bank. Mr Stewart is now head of broker Cenkos, which is set to float later this year. "Everybody was walking around in their bowler hats talking about how terrible this was. But if not for Big Bang, our financial community would be the size of the Isle of Wight."
The professionalisation of the City helped make London the home for international companies that it has become today. Of the 419 listings on the LSE's main market and the Alternative Investment Market last year, nearly a quarter were foreign companies.
Some are still sentimental about theancien régime. "There was undoubtedly a charm about the old City, which has gone," Mr Smith says. "Those who were around, and lucky enough to experience it, regret its passing, but recognise that it almost certainly had to go."
Big Bang also added a whole new layer of regulation, paving the way for what became the Financial Services Authority. Consider the privatisation of BT in 1984. The deal raised more money than all of the flotations the year before, yet the prospectus was only 64 pages. Today, "a prospectus for anything of that size would be 400 to 500 pages," says a banker who worked on the deal.
Some City veterans reckon that much of the change would have happened anyway. They see Big Bang as a catalyst. "The arrival of the Americans and American practices has been very influential," says one. "Before Big Bang, every company had a bank and a broker, and we had to do much less marketing. But frankly, we didn't come up with as many ideas because we didn't have the icy breath of competition on us."
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