‘Big Bang 2’ reforms expose the City’s weaknesses

The writer’s latest book is “Agent Twister”, a biopic of John Stonehouse, co-written with Kelly Winston.

Among the large tax increases in the finance minister’s fall statement, a large tax cut stood out as going against trend. A 5 percentage point cut in the 8 per cent surcharge imposed on the profits of major banks in 2015 in the aftermath of the Great Financial Crisis would cost the Treasury more than £1 billion a year.

With a £55bn gap to fill and a strong case for investment in skills and the public sector, it must have been a close call. And given their profits from high interest rates and market volatility, it’s not as if the big banks need the money.

Nor was the tax cut the only concession for the financial services industry. It has been confirmed that bankers’ bonuses will indeed be capped and capital restrictions on insurers will be eased through the Solvency II review, an EU-inspired regulation. After 15 years of political coolness, the package was hailed by the industry as a sign of glasnost.

But this is not the time to celebrate. These tactical reforms are more a sign of the city’s weakness than of its strength.

The financial services industry, of course, continues to be an engine of the UK economy. It contributes more than 10 per cent of total tax revenue, employs one million people and is one of the few major British industries to show a balance of trade surplus. London dominates the global trade in derivatives, foreign exchange and parts of the bond market. In an economy thirsty for growth, such successes need nurturing—particularly when the structural weaknesses in the industry are also evident.

The city won’t fall far, but after more than three decades of growth since the Thatcher government’s Big Bang reforms, this grand national cash register can no longer be taken for granted. Artificial intelligence, outsourcing and Brexit-inspired immigration have killed 76,000 financial services jobs since September 2019, according to a recent New Financial paper. This is superficial damage and not yet serious, but a more serious loss of prestige in the equity-linked business, once the cornerstone of British companies, is already beginning.

The value of shares listed in Paris, once the distant runner-up in the race to be an outstanding financial capital, now drives the value of London. Like Paris, Amsterdam has also been a beneficiary of immigration in post-Brexit stock trading. For regulatory and accounting reasons, British pension funds and insurers, the traditional gatekeepers to corporations, are seriously short of equities – especially British equities.

In a partly related decline, London’s global share of initial public offerings has fallen from 25 percent to 5 percent in less than two decades. These IPOs are absolutely crucial to prospects in the broader economy: they tend to be the small and medium-sized companies that go public and create future growth.

Once upon a time, all British companies seeking public listing did so in London. Now, more and more growing companies in the technology and life sciences industries are choosing to do so on NASDAQ. Listing abroad does not necessarily mean that the entire company will eventually go abroad but in the long run it may. And when the economy needs to boost every source of growth, that’s a problem.

Without neglect – we don’t need a return to light regulation – there is little governments can do to resist the inevitable. Amendments to the London Listing Rules may help; So Mifid II, one of the EU regulations implemented in 2018, may be scrapped. It aims to increase transparency for investors by separating broker-paid asset managers into research and execution streams, and its actions have collected a worthy target of unintended consequences.

Large Wall Street brokers absorbed most of the research costs and put pressure on smaller competitors through aggressive pricing. This has led to reduced research coverage of SMEs, and dried up market liquidity in this area. The vacuum in London encouraged new British companies to pursue funds and those established in the United States. Reversing Mifid II would help restore research coverage and boost market liquidity, but the horse has pulled back to New York where the capital is. It’s a long way back.

As a result of decisions made long ago, tax cuts or not, there is not much that needs to be done. Hunt’s reforms have been optimistically tracked as Big Bang 2 but are not as significant as 1986. Rather, this is a partial response to intensifying foreign competition in a strategically important industry. The real Big Bang encouraged American domination of the capital markets, leaving few British institutions on the buy or sell side able to act in the national interest. Rather than risk losing out to offshore financial centers, the government stepped in to help an industry that could not help itself.

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