Hamish McRae: Big Bang propelled the City into the firmament, but can it keep its lead?

The City's Big Bang has its 20th birthday next week: 1986 was the year when London's finan- cial services industry made three giant changes to its organisation - changes that have led to the City's elevated status as the world's largest financial centre for global business.

One was to end the century-old distinction on the London Stock Exchange between jobbers and brokers: jobbers dealt as principals making markets in shares, while brokers were only allowed to trade on behalf of clients. A second change was to allow foreign groups to buy UK stock-market firms. And the third was the ending of the discount house monopoly on issuing government securities.

All these old ways had their purposes. The jobber-broker split had been there to stop securities houses offloading shares, bought at the wrong price, on to their unsuspecting clients. The restriction on foreign purchasers had enabled the Stock Exchange to be policed informally, with club members disciplined by peer pressure rather than legal fiat. And the use of the discount market had guaranteed that the Bank of England could sell stock even in adverse market conditions - something that had been important straight after the Second World War, when the national debt was more than 200 per cent of GDP.

Two other elements of the old London system also died. One was an informal agreement that the top merchant banks, the members of the Accepting Houses Committee, would remain British and that their ownership would only change with the Bank of England's consent. The other was that share trading on the floor of the exchange would end and switch to an entirely screen-based system. The exchange was refitted to cope with the changes but the floor-based system was swiftly sidelined and soon afterwards the floor was abandoned.

Given the scale of the changes, you can understand why it was called Big Bang, though I doubt anyone at the time foresaw the magnitude of what would happen.

London had, in the 1960s, invented trading in deposits over the phone, adapting the technique of foreign exchange trading to dealing in local authority and foreign currency deposits - most notably the eurodollar market. This became the global standard.

But in the securities markets the London system had become an anachronism. Not only was it different from the system in the US, it was too from the one used by London's own international securities business. On the foreign share and eurobond markets, London firms could trade as both principal and agent.

Stock Exchange rules had been the main obstacle to change. The Office of Fair Trading launched a legal challenge against them two years before Big Bang, winning an out-of-court settlement under which the exchange gave up its restrictive practices. But even without the court case, commercial pressures would soon have forced it to yield ground.

The implicit deal at the time was seen like this. Foreigners would be allowed into the London securities market, as they had been already into banking and to a lesser extent insurance, in return for getting London into the same sort of dominant position in international securities as it was in banking.

That has been delivered in spades. Indeed, the relative position of London in international securities is even stronger than it is in banking. If anything, London has been gaining global market share in international finance in recent years and that would not have been possible without Big Bang.

On the other hand, none of us realised the extent to which London's business would be taken over by foreigners. Only one of the big old merchant banks, Rothschilds, remains under British ownership and it is protected by the family. All the others have disappeared. The large stockbroking firms have gone too - or at least have completely lost their identities.

We should not feel too sorry for the partners of those firms , who were, in the main, well paid for their businesses. But the loss of control came as a shock.

"What I can't understand," said a friend whose business had been taken over, "is that they paid us so much money and then they make us so miserable." His was a company that famously spent more on lunches for the partners and their clients than it did on equity research, so you can see why he was so upset. He left shortly afterwards.

A more substantial failure was the way in which the big UK-owned securities houses did not make the grade. You would have imagined that the Barclays-owned BZW or the merchant bank Warburgs, seen by many as the most competent of the "accepting houses", would have survived. Maybe we were just not as good as we thought we were.

What is beyond dispute, however, is the scale of the contribution that the industry, post Big Bang, has made to the economy.

You can look at that in two ways, as the graphs show. On the left you can see how London and the South-east generate more than half the value added by the country's financial services. Those are 2003 figures, as the regional breakdown for GDP is published after a considerable delay, but we do have 2005 numbers for the financial services sector as a whole. The share has continued to rise, reaching 8.5 per cent last year.

Professional services such as accounting, legal and management consultancy are now running a little under 4 per cent of GDP. Most of that business is off the back of international finance, so you could say that the total for financial and associated services is now more than 12 per cent of GDP. That compares with manufacturing, which was down to 13.6 per cent last year. On these trends, financial services will be larger than manufacturing in three years' time, making Britain almost certainly the first large economy where they cross over.

That will be a historic moment and one that will deserve some reflection. Obviously, the needs of the financial services industry will affect national politics in the way that the needs of manufacturing still do. You can see that already, with Gordon Brown and Ed Balls taking great care not to offend the City.

More generally, the dominance of London and the Home Counties will increase relative to the rest of the country. That will make some people uncomfortable. And it leaves us with a lot of eggs in one basket. As you can see, during the late 1990s, the share of GDP in financial services slipped a little.

So no one should take the present success for granted. Every developed country wants a slice. Places such as Dublin and Luxembourg are picking off bits of London's fund management business. Bolting down the gains of the past 20 years will be an important task for the next 20, and it won't be an easy one.

Britain: a nation of internet shopkeepers

The e-revolution races on. The Office for National Statistics produced new estimates last week for the value of UK internet sales by businesses in 2005, suggesting that they rose by 56 per cent on 2004 to reach £105bn. Much of this, nearly £73bn, was business-to-business rather than sales to individuals, but both are rising fast.

To put this in context, total GDP last year was £1,200bn, so we are talking about nearly 9 per cent of the economy being online. That was last year; the proportion will be higher now.

A second bit of new info came from the OECD. It estimates broadband access every six months and its figures for the middle of this year show that, among the Group of Seven, the UK is now second after Canada for broadband penetration. We are even ahead of the US as well as Japan, Germany, France and Italy. Scandinavia, the Netherlands and Korea lead the global table.

In Denmark, nearly 30 per cent of the population has access to broadband, compared with a little under 20 per cent in the UK. Still, there is some evidence that commercial use of the internet here is running even higher than in Scandinavia: around 70 per cent of Britons buy something online at least once a year, more than anywhere else in Europe.

So it would seem the UK has caught up with the US and most of the Continent in use of the internet. The next issue will be speed, for the coming revolution is the optical-fibre one, with some countries now rolling out fibre to office and apartment buildings and even directly into homes.

When that becomes the norm, speeds can shoot up, so it becomes possible to deliver TV-quality streaming video or even high-definition video over the internet. That is probably the stage where the full convergence of the television and the computer is achieved.

Perhaps the most interesting thing here is that an apparent lead in access to technology does not necessarily mean a corresponding lead in applications. Korea did the fastest roll-out of broadband, but it was the US that gave us Google and YouTube.

Interesting? Click here to explore further