27 October 2016

Big Bang Revisited

Thirty years ago, at the end of October 1986, the City of London went through what became known as the Big Bang.

The result of several years of discussions, debates and reports, it effectively dismantled the old, clubbable world of the Square Mile and replaced it with more formal regulation and greater competition. Old City firms were swiftly bought by foreign financial giants and the old order was swept away forever. Many of the names that existed ahead of this major shakeup have disappeared for ever, though not that of JM Finn & Co.

There were three principal changes that Big Bang ushered in. First, full foreign ownership of firms that were members of the London Stock Exchange was allowed. Second, the distinction between jobbers – the firms that traded shares and bonds on their own behalf to facilitate the purchase or sale of securities – and brokers, which bought and sold stocks and shares on behalf of the end investor, using the jobbing system, was done away with. Finally, the fixed commission system that dictated what brokers charged their clients was abolished.

How important were these changes? Obviously they were very important as the entire landscape of the City changed out of all recognition in a relatively short period of time,  the way in which technology has become such a powerful component in financial services can also be considered a massive driving force for change. Arguably Big Bang was no more than the City bowing to the inevitable. It certainly helped reinforce London’s position as the principal financial centre in the European time zone. Now the question on everyone’s lips is whether Brexit will remove this advantage.

While it is too early to be certain quite how our departure from the European Union will affect London’s standing in the global financial hierarchy, there are plenty of signs that Paris and Frankfurt are both keen to get in on the act. Some major institutions have already announced plans to beef up their continental presence in case restrictions are imposed on London, with possible job losses mentioned. It does not follow, though, that this will amount to much and if any financial centre looks likely to benefit from a diminution of London’s status, New York probably stands a better chance than centres in France or Germany.

Meanwhile, markets continue in a robust manner. Given the uncertainty created by our pending leaving negotiations with the European Union and the imminent US Presidential elections, this appears a little surprising. The fact is, though, that economically the referendum result does not seem to have had much effect, while the US economy remains relatively stable. Still, some fear investors are failing to price political risk into their thinking.

Perhaps the most significant recent development here at home is the re-emergence of inflation as an issue. If anything the Bank of England seemed relieved at the recent jump in the cost of living. Given the weakness of the pound, such a development was inevitable and it is likely we will see further increases as increased costs due to higher import prices start to bite. While the fall in the pound may well have been overdone, the inflation numbers will need to be followed closely over the Brexit discussion period.

Understanding Finance

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