London Calling: The History of the City as Financial Centre
Just over thirty years ago, London was transformed.
London had been a leading global financial centre since the 1960s. But on October 27th 1986, it became the global financial centre.
Margaret Thatcher’s “Big Bang” meant a dramatic deregulation of financial markets. Fixed commission charges and the distinction between stockjobbers and stockbrokers on the London Stock Exchange were abolished. Open-outcry was replaced by screen trading. The details might seem trivial – but they affected a profound shift in London’s status.
Since then, the city has consolidated its position, becoming synonymous with free markets, globalisation, and financial innovation.
The reforms of the mid-1980s changed London forever, expanding the boundaries of the “Square Mile” as far east as Canary Wharf and as far west as Mayfair. Only thirty years ago, the former was a desolate wasteland – now it’s the epicentre of global capitalism. Mayfair was the domain of art dealers and private member’s clubs – today it’s home to the world’s leading hedge funds. The old City of London has grown too, with Liverpool Street and St Paul’s dotted with skyscrapers and an entire service economy dedicated to a growing population of finance professionals.
Why London? Sterling is hardly a reserve currency and with the hegemony of the US Dollar since WW2, you’d be forgiven for expecting New York or Chicago to be the preeminent financial hub. But the United States has chosen a different path, characterised by heavy-handed regulation and intervention from policymakers. By comparison, the UK has been a beacon of free market capitalism, attracting capital, talent and ideas from all over the world.
The foreign exchange market has been at the forefront of this movement, far more so than stock and bond markets, which were subject to a division between brokers and market makers. In the early 1980s, this changed. International and domestic banks based in London began to acquire brokerage firms in order to pioneer a new integrated banking model whereby broking, dealing and underwriting activities happen under one roof.
Then came Big Bang, a pivotal moment in British economic history and the birth of a second empire. Gone were archaic rules that gave domestic incumbents a competitive advantage against their international peers. Financial institutions the world over joined the party, particularly US commercial banks, for whom securities trading was banned at that time.
These reforms secured London’s position as global centre for securities trading. And the changes were more than regulatory. There was a profound culture shift, too. Gone was the anachronistic British stuffiness, replaced with a new, more inclusive and meritocratic approach that valued talent and performance over education and social network. Days started earlier and finished later. Bonus payments outstripped base salaries.
The late 1990s brought another threat to the City’s status – the creation of a single European currency. Many feared that power would slip away from London to Frankfurt, home of the ECB. But the euro actually strengthened London’s hand by reducing the efficiency of small, individual financial centres across the continent. The move towards financial integration in Europe was a victory for the world’s most integrated financial centre.
Since the early 2000s, London has embraced innovation and benefited from the proliferation of new products, particularly OTC derivatives as a mechanism for risk management and speculation. The “light touch” regulation of the New Labour years helped accelerate this trend but also sowed the seeds of the global financial crisis of 2007/8.
Since Big Bang, we’ve seen meteoric economic growth, job creation and investment in the real economy. We’ve also seen deep recessions, bank failures, systemic financial crises and popular anger at the perceived shortcomings of “casino banking”.
Here at Origin, we believe London will remain at the heart of global finance going forward, but the growth in the sector will be different to the phase we enjoyed from Big Bang through 2008.
In a recent conversation with a senior political operator from the EU, I detected a collaborative tone towards London, which is viewed by many as a partner, not a competitor. But there’s no escaping the fact that Brexit is going to be challenging, perhaps more so than first envisaged. We’ve already seen some workforce relocations from the likes of JP Morgan and Goldman Sachs. Right now, 90% of EUR denominated derivatives are cleared in London and with the UK set to leave the EU, the ECB will almost certainly want to move those operations to a Eurozone country. After all, there are strong alternatives, such as Frankfurt, Paris and the oft-overlooked Luxembourg.
The biggest threat to London isn’t just the potential loss of EU passporting or other technical details around the market’s structure. It’s that many Europeans who work in London will feel that the high cost of living and the poor quality of life are no longer worth forgoing a life in Stockholm, Copenhagen, Paris or Milan. Having said that, English language, English law and the UK’s stable tax regime are fundamental advantages that will not surrendered easily.
What is the City, really? It’s more than a collection of buildings and busy people. It’s a web of relationships between global counterparties. An economy of scale. A marketplace. It’s more than banking– other professional services cluster around financial services, and London is a now a leading global centre for law, accountancy, management consultancy, insurance, even shipping.
That cluster makes London fundamentally anti-fragile. With prudential oversight and political sponsorship, the City can become more than resilient – it can actually benefit from disorder in the years to come. One thing nobody is talking about within the context of Brexit is China. But the international partners that China chooses will benefit strongly over the coming years, particularly as the country’s immensely ambitious “Belt and Road” initiative grows.
This is just one example of how London must continue to look outward, beyond competition to collaboration with international partners from the EU and beyond. London’s future lies in partnership and cooperation on a global scale.