‘Big Bang 2’ reforms reveal the City’s weaknesses
The writer’s latest book is “Agent Twister”, a biography of John Stonehouse, co-written with Keely Winstone
Among the series of tax increases in the Chancellor’s autumn statement, one substantial tax cut stood out as going against the grain. Reducing the 8% surcharge imposed on the profits of big banks in 2015 following the Great Financial Crisis by five percentage points will cost the Treasury more than £1billion a year.
With a £55billion hole to fill and a strong case for investing in skills and the public sector, it must have been a close call. And, given the profits they make from rising interest rates and market volatility, it’s not like the big banks need the money.
Nor was the tax cut the only concession to the financial services industry. It was confirmed that the cap on bankers’ bonuses would indeed be abolished and capital restrictions on insurance companies would be relaxed through a revision of Solvency II, an EU-inspired regulation. After 15 years in the political cold, the package was greeted by the industry as a sign of glasnost.
But now is not the time to party. These tactical reforms are more a sign of the City’s weakness than of its strength.
The financial services sector remains, of course, a driving force in the UK economy. It contributes over 10% of total tax revenue, employs a million people and is one of the few major UK industries to post a trade surplus. London dominates global trading in derivatives, currencies and parts of the bond market. In an economy starving for growth, such successes need to be nurtured, especially when the structural weaknesses of the industry are also evident.
The City is not going to collapse, but after more than three decades of growth since the Thatcher government’s Big Bang reforms, this great national cash register can no longer be taken for granted. Artificial intelligence, outsourcing and Brexit-inspired EU job migration have led to the disappearance of 76,000 financial services jobs since September 2019, according to a recent article by think tank New Financial. This is superficial and not yet serious damage, but a much more dangerous loss of position in the equity-related business, once the lifeblood of British business, is already underway.
The value of shares listed in Paris, once a distant second in the race for the preeminent financial capital, is now pushing that of London. Like Paris, Amsterdam also benefited from a post-Brexit migration of equity trading. For a variety of regulatory and accounting reasons, UK pension funds and insurance companies, the traditional gatekeepers of the corporate portal, are heavily underweight equities, particularly UK equities.
In a partly related fall, London’s global share of IPOs fell from 25% to 5% in less than two decades. These IPOs are absolutely essential for the prospects of the wider economy: it is usually small and medium-sized companies that list on public stock exchanges and create future growth.
In the past, all British companies wishing to list on the stock exchange did so in London. Today, more and more growing companies in the technology and life sciences sectors are choosing to do so on the Nasdaq. Listing overseas does not necessarily mean that the entire company will eventually go overseas, but in the long run it is possible. And when the economy has to favor all sources of growth, that’s a problem.
Without becoming careless – we don’t need a return to light regulation – there is little governments can do to resist the inevitable. Adjustments to London’s registration rules can help; the same goes for the abolition of Mifid II, an EU regulation implemented in 2018. Intended to increase transparency for investors by separating money from asset managers paid to brokers into research streams and execution, his actions combined a laudable goal with unintended consequences.
The big Wall Street brokers absorbed most of the research and pressure from smaller rivals by predatory prices. This has led to a reduction in coverage of small and mid cap research and market liquidity in this area has dried up. The vacuum in London has encouraged new UK businesses to follow the money and list in the US. Reversing Mifid II would help restore research coverage and boost market liquidity, but the horse has flown to New York where the capital is located. It is far.
Following decisions taken a long time ago, tax cuts or not, there is not much to do. Hunt’s reforms were optimistically watched like Big Bang 2, but they weren’t nearly as momentous as 1986. Rather, they were a partial response to increased foreign competition in a strategically important industry. . The real Big Bang encouraged American dominance in capital markets, leaving few British institutions on the buy or sell side capable of acting in the national interest. Rather than risk losing to foreign financial centers, the government has stepped in to help an industry that cannot help itself.