Big Bang II: After Brexit, what’s next for the City of London?
One chilly morning in the mid-1970s, David Mayhew was tramping the streets of the City of London. His mission? To head off a stock market crash. The Bank of England had asked Mayhew, a dealing partner at Cazenove, and a few other City brokers to support it in a clandestine operation.
This select group called upon the insurance companies and major pension funds that owned Britain’s blue-chip companies to step in and buy more shares. As the investors made their covert purchases, market prices gradually improved. This co-ordinated exercise helped to ensure the stability of the system. “Our exercise was one for the common good,” recalls Mayhew. In today’s terms it would be completely illegal.
This manner of doing business, in which a handful of influential individuals could orchestrate the markets, was already on the cusp of being swept away. From 1983, Conservative prime minister Margaret Thatcher began ushering in a suite of radical reforms that, by deregulating the UK’s financial markets, would sow the seeds of the new City.
Collectively known as “Big Bang”, the measures were passed on October 27 1986, paving the way for the City to compete on the international stage. It has done so effectively ever since, albeit with more restraint since the financial crash of 2008.
Today the City is hovering on the brink of Big Bang II. As the repercussions of the vote for Brexit unfold, much remains at stake. Banking and finance contributes more to the UK economy than any other sector. Around 35 per cent of EU wholesale financial services activity takes place in London as well as 59 per cent of international insurance premiums, helping to generate a trade surplus of £72bn for the UK in 2014.
While mounting popular resentment over immigration levels fuelled Britain’s decision to leave the EU, nearly 11 per cent of the City’s 360,000 workers come from elsewhere in the union. EU membership brought the financial sector two key benefits — access to these skilled migrant workers and a free passport to sell products and services across the region’s “single market”. Both are now threatened.
“Brexit may mean a reverse Big Bang for the UK’s relationship with Europe,” says Pierre-Henri Flamand, senior portfolio manager at $26bn hedge fund GLG Partners. “But it could mean Big Bang II for its relationship with the rest of the world. Brexit could improve the City’s prospects of doing business in parts of the world such as Asia and Africa where the growth is, and where the ability to strike trade agreements may have been hampered by the UK’s membership of the EU.”
Like Flamand, a few voices within the City are touting the potential for a bright future. They focus not on the undoing of the established order but on the freedoms that will come from being untethered from a prescriptive EU. But negativity is more prevalent.
Foreign financial institutions such as Goldman Sachs, Citigroup and JPMorgan Chase are already weighing up their commitment to the UK, while rival European cities such as Paris, Frankfurt and Warsaw are launching a charm offensive to steal business from London.
Brexit may mean a reverse Big Bang for the UK’s relationship with Europe
All of this could threaten London’s status as Europe’s financial centre, itself a direct result of Big Bang three decades ago. “Twenty years before Big Bang, London was by no means secure as the place in Europe that financial services firms had to go,” says Peter Stormonth Darling, former chairman of Mercury Asset Management.
“After Big Bang, there was no doubt London was the global marketplace where you had to be located. Post-Brexit, I think that cities such as Frankfurt, Paris and Zurich will take business at the edges but they don’t have London’s infrastructure, people or services industry that they would need to become Europe’s global financial centre.”
If Mayhew and his band of brokers were the men of the moment in the 1970s and 1980s, today — after decades of internationalisation, deregulation and re-regulation — power and influence in the City is far more diffuse, albeit with the perennial mix of old-school bankers and wheeler-dealers. Politicians and regulators hold more sway than ever. Asset managers have replaced investment banks as the dominant force in the markets. And technology is hollowing out every corner of finance.
Against this backdrop, the Financial Times assembled a panel of expert judges to identify the most influential individuals in the City in a list that will be published exclusively by the FT on Friday. These 30 men and women may determine what becomes of the City over the next three decades.
1986 and now: The London Stock Exchange
■ 20,000: The average daily number of equity trades on the London Stock Exchange in 1986. By 2016 it was 990,000
■ £700m: The average daily value traded on the London Stock Exchange in 1986. By 2016 that had grown to £5.07bn
Policymakers have always been a powerful force in finance. Indeed, Thatcher’s legacy of deregulation still pervades the City. By stripping away the barriers between banking, investment advice and share trading in 1986, almost all of the worthy City institutions — from SG Warburg and Schroders to Morgan Grenfell and Cazenove — were swallowed up by the big banks of Wall Street, continental Europe and beyond.
Of the prominent names of the 1980s, only Lazard and Rothschild have survived intact. UBS, Citigroup, Deutsche Bank and JPMorgan led the acquisitions, ushering in the American model where banks could both sell shares and bonds to investors as agents, and trade in them as principals.
“The City became hugely successful because it was a place that foreigners wanted to do business in and from,” says Sir Simon Robertson, former president of Goldman Sachs in Europe who now runs advisory boutique Simon Robertson Associates.
This internationalisation of the City paved the way for hard-charging American investment bankers and French polytechnique types devising ever more complex derivatives models. These newcomers watered down the monoculture of the old boys’ network, which, since 1923, had lived by the London Stock Exchange’s motto: “My word is my bond.” The stock exchange itself was transformed from an open-outcry system to electronic, screen-based trading.
Lord Sterling, then a senior adviser in the Department of Trade and Industry, recalls a conversation shortly after Big Bang with the late John Weinberg, who was running Goldman Sachs at the time. Weinberg was thrilled with the opportunities for the US bank’s fledgling business in Europe. “Because of Big Bang,” he told Lord Sterling, “we will do in five years what would have taken us 25.”
Being a launch pad into Europe was a vital draw. Michael Sherwood, co-head of London-based Goldman Sachs International, recently bemoaned the prospect of Brexit and extolled the turbocharge to business that came from the UK’s membership of the EU and the creation of the euro. “The biggest pick-up in our business in Europe was the advent of the single currency in 1999,” he says. “Our revenues increased 50-60 per cent in short order.”
As Brexit negotiations progress, policymakers promise to become even more powerful — from the chancellor of the exchequer to the Bank of England’s monetary and financial policy experts and the watchdogs at the Prudential Regulation Authority and the Financial Conduct Authority. Bankers and brokers, by contrast, have seen their influence fade. A decade ago, they would have made up more than half of most people’s City top 30. Yet they account for only half a dozen of the FT list.
At the time of Big Bang, a lot of people expected to spend their entire career at one firm — and they did. Now it’s different. While greater job mobility enables businesses to hire more talent, it also has important implications for trust and relationships, says Michael Dobson, chairman of FTSE 100 asset manager Schroders. “People tend to view companies as a platform on which to build their own career. My sense is that networks were quite a lot stronger back then. In terms of very strong personal ties and trust, it goes with the longevity of the institution and people staying in that institution.”
As the partnership model of the old merchant banks waned and the bank emerged as a bigger one-stop supermarket, the individual took a back seat. The institution, the brand and the machine began to be more important.
Some of the vestiges of the old networks have been shown to be rotten in recent years. Witness the Libor rate-fixing scandal and the private cartels operating in foreign exchange. Banks themselves are now in decline, cowed by a regulatory clampdown following the 2008 crash. When banks were bailed out by taxpayer money, the overwhelming rhetoric became one of banker bashing. The City appeared divorced from the rest of the country, inhabiting a parallel universe where huge pay packages were common and conflicts of interest were rife.
This reputational crisis coupled with the weakness of Europe’s economy has further undermined the banks. Many of the big European beasts of the boom years are in retreat (UBS, Barclays) or in disarray (Royal Bank of Scotland, Deutsche Bank). Relatively thriving US operators such as JPMorgan no longer have the swagger of the pre-crisis years. The balance of power in the financial ecosystem has shifted to their clients: the asset management industry, which has benefited from its own clients searching for returns in a low-interest rate environment. BlackRock, the $4.77tn asset manager founded and led by the ebullient Larry Fink, is widely seen as more powerful than Goldman Sachs or any of the big banks.
Mergers and acquisitions work continues to prosper. In the aftermath of Big Bang, the US banks cleaned up. The Americans brought slick pitch books, heavy analysis and US defence techniques with them, shaking up the sleepy British way of doing business. Gone was the long and boozy lunch in wood-panelled dining rooms at the old merchant banks. Many of the new arrivals lived by the “lunch is for wimps” mantra of Gordon Gekko, the stockbroker anti-hero of the 1987 film Wall Street. Château Margaux was out. Power breakfasts and fizzy water were in.
Today, a new generation of dealmakers is shaking up the old order and M&A is booming again. Boutique firms such as Zaoui & Co, Robey Warshaw and Ondra Partners have emerged on the scene, led by the rainmakers who built the European M&A divisions of US banks such as Morgan Stanley, Goldman Sachs and Lehman Brothers before striking out on their own. Their names frequently crop up on the biggest deals while their boutique structure allows the individuals who run them the freedom of working for themselves — with much greater potential rewards. More deals have also been lucrative for the public relations industry, which grew up during the 1990s deal boom.
M&A advisers like to base themselves in the smarter parts of town, typically around Mayfair and St James’s. Colonised in the 1990s by vast private equity firms, the district then became a spawning ground for hedge funds — private pools of capital, managed on behalf of rich individuals or institutions that emerged as a high-cost but potentially higher-return alternative to traditional asset managers. Today Mayfair is also the social centre of London’s financial services industry, reflected in the success of private members’ clubs such as 5 Hertford Street and The Arts Club.
And while no self-respecting hedge fund manager would be seen dead on the Tube, the 1999 extension of the Jubilee line from St James’s Green Park station to Canary Wharf, where the big Wall Street banks had set up, was symbolic as well as practical. The City was no longer synonymous only with the Square Mile district around the Bank of England, it now had two new offshoots to the west and east.
We decided Canary Wharf should offer a new product for London... at half the price of rents in the Square Mile
When the construction of Canary Wharf had begun in 1988, rehabilitating the derelict Docklands area, the site’s developer Olympia & York was fresh from finishing the World Financial Centre in New York. Sir George Iacobescu, chairman and CEO of the Canary Wharf Group, moved to London to oversee the project. “At the time, there wasn’t a single high-rise building in London, with the exception of the NatWest Tower [now Tower 42, near Liverpool Street]. Roughly 90 per cent of the buildings in the City were not fit for purpose. We decided Canary Wharf should offer a new product for London consisting of large office buildings . . . delivered very quickly and ready for modern technology at half the price of rents in the Square Mile.”
An advertisement for Canary Wharf in the Financial Times on the day of Big Bang in October 1986 promised it would “feel like Venice and work like New York”. While today’s residents might quibble with the Venetian comparison, Canary Wharf continues to expand. Banks such as HSBC, Citi and JPMorgan made it their European headquarters, and an entire ecosystem of professional services firms such as lawyers and accountants has grown alongside them.
The next 30 years
The question now is what the next 30 years will bring for the City. Much depends on where the uncharted road to Brexit leads. More than ever politicians and regulators are in the driving seat. But, at the same time, a clutch of the City’s grandees, many chairing the big banks and insurers, are leading the lobbying effort to secure the future of the UK’s financial services industry.
Brexit scenarios that could emerge in the next few years include a hostile divorce, a clean break, an amicable transition or a change of heart — all of which have drastically different implications for the City. For those individuals with the power to influence the City’s future, the stakes are high. London’s advantages — its English language, rule of law and professional services infrastructure — won’t disappear overnight. But key questions are emerging as financial institutions weigh up their future in a UK outside the EU.
My biggest fear is that we don’t take full advantage of the potential upside to Brexit
This is tied to the terms of a Brexit deal that will take many years to thrash out. It will depend on the extent to which the UK is able to negotiate some sort of bespoke deal to access the single market and whether its EU nationals will find it far harder to work in the City. While few believe that “passporting” access to the single market can be retained at the same time as constraining EU immigration (an imperative for prime minister Theresa May), the City is hopeful that some form of market access can be achieved by exploiting “equivalent” regulatory status. The Cabinet, however, is split on where the precise priority should be on single market access versus immigration control. For many in the City there was relief at the pro-business Philip Hammond’s appointment as chancellor but dismay at veteran Eurosceptic David Davis’s role as Brexit minister.
The UK could reinvent itself with a new mission. For those who voted Leave in the referendum, Brexit is an exciting opportunity — for the UK to deregulate and stimulate growth. Many in the City have resented being ruled by what they deemed to be an unelected bureaucracy in Brussels. In effect, the City could now position itself as a Singapore of Europe, a less regulated offshore centre. The UK already has a growing presence as a base for offshore renminbi trading and in April unseated Singapore as the second-largest clearing centre for the currency after Hong Kong.
“My biggest fear is that we don’t take the full advantage that comes from the potential upside to Brexit through deregulation of business in general, not just financial services,” says Howard Shore, executive chairman of Shore Capital Group. “If we want to compete with other cities in the future, it’s not cities in Europe, it is cities further afield like New York, Hong Kong, Singapore and Shanghai.”
The City and the EU
■ 308,000: People were employed in financial services in London in 1986 at the time of the first ’Big Bang’. By 2014 that had grown to 358,100
■ 11 per cent:Percentage of all City workers who are from other European Union countries
■ 35 per cent: Percentage of European Union wholesale financial services activity which takes place in London
■ 126: Number of companies from other EU member states listed on the London Stock Exchange
The City could potentially backtrack on European regulations it especially dislikes, such as those around curbs on bankers’ bonuses. However, more cautious voices note that deregulating while also remaining “equivalent” with EU rules, so as potentially to retain at least some single market access, would be tricky. Worse, reviving a light-touch approach — widely blamed for stoking the meltdown of 2008 — could well sow the seeds of another financial crisis.
Any suggestion that “London could become a super-competitive environment on the basis of a regulatory race to the bottom” should be treated with caution, says Xavier Rolet, CEO of the London Stock Exchange Group. “Competing on the basis of loose conduct or prudential regulation cannot be the basis for a long-term solution for the UK. It works for a while but when there is too much leverage in the system, it crashes again as it always does and then has to be bailed out by the taxpayer.”
Whatever the regulatory environment, developments in technology will only increase their influence in shaping the City. London has emerged as a “fintech” hub with companies such as TransferWise, Zopa and Funding Circle transforming how companies and individuals raise, lend and transfer money. Blockchain technology promises to revolutionise back offices.
Competing on the basis of loose conduct or prudential regulation cannot be the basis for a long-term solution for the UK
For many financial services firms, companies such as Google and Facebook, and an array of start-ups, have emerged as the main threat in the war for talent. In today’s banks, pay is lower, progression is slower, and the infamously long hours that were seen as a rite of passage by previous generations don’t wash with millennials seeking a better balance between work and play. Even Goldman Sachs, perhaps the most prestigious of the big investment banks, has started to rebrand itself as a technology company in an attempt to hang on to its ability to recruit.
This is all happening as artificial intelligence and robotics transforms the world of work. About a third of UK jobs are at risk of being replaced by machines in the next two decades, according to a 2015 study by researchers at Oxford university and Deloitte. “The most pressing issue is having people who understand the nature of the technological industrial revolution that’s going on,” says Lord Mervyn Davies, a former Standard Chartered chairman and Labour minister. “During the next five years the power base will fundamentally change. It’s difficult for some companies and individuals to comprehend how fast business models are changing.”
Just as David Mayhew’s old guard gradually faded under Thatcher’s reforms, making way for the internationalisation of London, so today’s financiers will have to adapt to technological advance, regulatory overhaul and Brexit. But even some of those who opposed leaving the EU are heartened by the capital’s capacity for reinvention. As Canary Wharf’s Iacobescu says: “London goes perpetually through a renaissance and the possibilities for recreation are endless.” Time to brace ourselves for Big Bang II.
Harriet Agnew is the FT’s City correspondent. Patrick Jenkins is the FT’s financial editor
Photographs: Matthew Lloyd; Rolls Press/Popperfoto; Daniel Leal-Olivas