Nick King: London is unlikely to have another “Big Bang” moment – but here’s how we can boost its potential post-Brexit

15 Jan

Nick King is a Research Fellow at the Centre for Policy Studies

When Rishi Sunak was recently asked whether the UKs departure from the European Union meant we should revisit the Big Bang Playbook for the City of London, what choice was there but to agree? After all, what self-respecting neo-Thatcherite Chancellor of the Exchequer could say anything else when such an enticing proposition is dangled in front of them by a newspaper editor (in this case, Andy Silvester, of CityAM)?

But the world were living in is not that of the mid-80s. The EU, for all its faults, does not have the equivalent of the Restrictive Practices Act which Nigel Lawson – another political hero of the Chancellors – worked so hard to overturn. The idea of another Big Bang moment, the kind of sudden, overnight liberation which occurred on October 27, 1986, is unlikely to materialise.

But that doesn’t mean that there isn’t huge scope to use Brexit to boost the City, and the British economy – especially if we learn the right lessons from those Thatcher-era reforms.

As well as sweeping away anachronistic, inefficient practices, the Big Bang served to introduce three vital new operating principles to the City of London, turning it from a relatively sleepy, parochial industry into a global powerhouse. Those principles remain as valid today as they were in the 1980s.

The first was to open the City up to the world. For generations, the institutions of the City had been highly clubbable places, populated mainly by members of the British establishment. The Big Bang introduced competition – and global competition at that – which led to drastic changes in attitude and performance. In time, that led to London becoming one of the important financial hubs in the world alongside New York, in either first or second place for insurance, investment banking, asset management, FX trading and more.

Some worry that leaving the EU risks this preeminence. Certainly, ever since the Brexit vote, it has been clear that Paris, Amsterdam and Frankfurt (among others) have had more than one eye on the opportunity to knock London off its perch. Fortunately, for all the reports of 100,000+ jobs going, the impacts thus far have been limited. As one industry player put it to me, not even the Germans want to go to Frankfurt.

But the ability to access, and deploy, capital across the continent is clearly vital, and jeopardised by the fact we have left the European Single Market without a deal on services. It certainly does not make sense for the City to be regulated by Europe: given the relative size of our financial services industries, that would be the tail wagging the dog. But the Chancellor and the Treasury need to negotiate a Memorandum of Understanding that allows us to continue to operate in, and cooperate with, the EU as soon as possible.

Yet we must also turn that challenge into an opportunity – to not just maintain but enhance the UKs status as a global centre for capital and financial services.

Our equity markets are already some of the deepest in the world. But we need to remain world-class and be able to finance the industries of tomorrow. The Listings Review, being undertaken by Lord Hill, is fully focused on achieving precisely that by making the regime more competitive.

Already it is estimated that the UK investment management industry manages some £10 trillion of assets. But again, we need to work harder to attract more capital from South America, the Middle East and South East Asia.

Attracting more capital – and talent – while continuing to build our reputation as a global centre for financial services should a central pillar of the Global Britain agenda.

The second principle from the Big Bang is proportionate regulation. Just as those reforms were predicated on, and driven by, regulation that works, we now need to make sure that our regulatory regime is one which supports rather than stifles our financial services industry – and which is tailored to our needs.

Coming out of the Single Market there are few voices clamouring for a bonfire of regulations in financial services. But at the same time, there is no point in sticking rigidly to a set of rules which dont necessarily work for us or our markets. Other authors on this site have, rightly, pointed to changes which should be made around the Alternative Investment Fund Managers Directive and the Markets in Financial Instruments Directive II. The collapse of the financial advice industry, in particular, has been entirely been driven by overzealous, anti-competitive regulation.

Another set of regulations we should put in the crosshairs are the Basel capital requirements, which can treat a small bank or a building society in the same way as a large investment bank – which also damages competition by making it much harder for the new challenger banks to compete. By taking a more proportionate approach, and freeing up domestic lenders’ capital, UK regulators can create a more competitive market and immediately unlock more funding for domestic priorities like sustainability, net zero and levelling up. It is also striking that Britain’s regulators rarely have a duty to consider the growth impacts of their decisions: as George Osborne once said, we do not want the financial services industry to have the stability of the graveyard.

Proportionate regulation is linked to the third pillar that drove the Big Bang’s success: our absolute reliance on innovation. The reforms of the Thatcher era brought in new players, new instruments and new ways of doing things. That same willingness to embrace innovation is imperative if we are to thrive in the future.

Today, despite our world-leading fintech industry, much of the pioneering innovation in financial services happens in Singapore, Shanghai and other Asian markets. Industry insiders claim that an abundance of caution prevailsat the FCA. For all the successes of its innovation “sandbox” (a concept some claim was forced on it by Osborne), it is still not doing enough to support innovation or to open up new markets. These are issues I have written about before but those in the fintech industry tell me FCA authorisation still takes too long.

The tone for the regulators is set by the Treasury, of course – and the Treasury needs to back innovation now like never before. It must ensure its regulators lose the “gold plating” mentality of old, which has put us at a competitive disadvantage, and use the Future Regulatory Framework Review to help us capture the global opportunities which abound.

The fundamentals of our financial services industry remain strong, as the Chancellor himself said, but they cannot be taken for granted. Despite the fact we are blessed in our language, timezone, history and rule of law, the forces of competition are ever stronger – on the continent and beyond. To maintain London and the UKs preeminent status will take hard work and determination.

And that, I would argue, is the most important lesson of the Big Bang. The new entrants, innovation and subsequent global success came about because we had a government that was ready to back the industry as required. It was a Government that recognised that financial services, the profit motive and shareholder interest were fundamental goods – and spoke out on their behalf.

We might not be in line for another Big Bang but to help us make the most of Brexit we need the Government to be pro-business, pro-City and to offer financial services enduring political support. If those principles are in the Chancellors “Big Bank Playbook”, then sign me up.

Why the Germans don’t always do it better

4 Sep

Every so often it becomes fashionable to use the understated brilliance and modernity of Germany as a stick with which to beat Britain for holding to absurdly antiquated ways of doing things.

I did it myself a few months ago, in a piece for ConHome suggesting that when the pandemic is over, we will have to look at what the NHS can learn from Germany.

Now John Kampfner has devoted a whole book, Why The Germans Do It Better, to this theme. It is a good title, but also a hostage to fortune. Will the Germans go on doing it better? Nobody knows.

And although the book, which I have not yet had the pleasure of reading, doubtless contains all sorts of prudent qualifications to the bold assertion in the title, it is bound to encourage the kind of Briton who already believes that compared to Germany, the United Kingdom is hopelessly old-fashioned and resistant to change.

I love Germany, and in the 1990s had the pleasure of living for almost six years in Berlin. During that time, I wondered in vain how to write a book about modern Germany which could be read for pleasure as well as edification.

For in those days, and I fear this is still  true, while educated Germans often had an almost perfect grasp of the English language, and a detailed knowledge of British society, the reverse was by no means the case.

In some well-to-do parts of German society, Anglophilia raged almost out of control. They dispatched their children to fee-paying schools in Britain, followed by British universities. Even their dogs seemed to come from Yorkshire.

I hope some German author is at work on a study of this phenomenon, entitled Why The British Do It Better, which can sit next to Kampfner’s volume on my shelf.

But the truth about Britain and Germany is more complicated than such compliments, or exercises in self-denigration, can convey. And although it is worth identifying the things the Germans do well, it would be naive to suggest that simply by copying German methods, we can transplant their successes to British soil.

John Major said in March 1991 that he wanted Britain to be “where it belongs, at the very heart of Europe”. This always seemed, from a geographical point of view, an implausible goal.

Germany is at the heart of Europe, surrounded by about 20 other countries, all of them smaller than Germany. This is an inescapable fact, and offers a powerful reason for developing some system of amicable co-operation with those neighbours, so none of them becomes worried by Germany’s preponderant size.

The United Kingdom is on the edge of Europe. We have fewer neighbours and wider choices. We may make a dreadful mess of those choices: the Union with Scotland is now in grave danger.

But there is not much profit in trying to deny that the choices exist. Yet this is what Major and his successors tried to do. They said it would be mad to adopt any policy other than being at the heart of Europe.

This accusation of madness did not prove a happy way of managing Major’s critics within the Conservative Party, who put up a dogged resistance to his European policy.

In the eyes of the kind of people who will feel themselves in instinctive agreement with Kampfner’s title, this protracted row was an embarrassment.

It showed how backward and barbarous some Tory MPs were. Individual parliamentarians were held up as examples of complete madness. None of the care and sympathy which are nowadays supposed to be extended to the mentally ill were extended to these Conservatives.

There was instead a brutal attempt to cast them and their ideas out of polite society.

Germany did not have an argument like that. Although the German people wished by a clear majority to keep the German mark, German MPs voted on 23rd April 1998 by 575 to 35 in favour of replacing it with the euro, with no fewer than 27 of the “no” votes coming from the PDS, successor to the East German communist party.

Chancellor Helmut Kohl assured German MPs that the euro would make Frankfurt a “very big financial centre”, that Britain would be a member of the new currency within a few years, and that Switzerland would join within ten years.

In the Frankfurter Allgemeine Zeitung, which I rejoiced to read each morning, learned professors of economics argued with anguished pedantry that the new currency could not work. Their opinion was widely shared by German voters, who loved going on holiday in Italy, or at least to the local Italian restaurant, but did not think sharing a currency with the Italians was a good idea, and feared German savers and taxpayers were bound to end up subsidising the weaker members of the euro.

Kohl promised them their fears were groundless, and kept the political class solidly behind the project. He was a power politician of genius, who exploited the fact that the opposition Social Democrats believed more devoutly in his European policy than his own Christian Democrats did.

Nor was he above maintaining his dominance with the use of illegal bank accounts. High ideals and low methods were yoked together, but for a long time only the former got much coverage in the German press.

Perhaps it is a good thing that Kohl succeeded: it is hard to tell, for we have not reached the end of the story.

But it is in some ways a pity that German politicians failed to have the argument among themselves which created such animosity within the Conservative Party.

German public opinion was not prepared, and the assumption took hold that one’s duty, as a member of the political class, is not to rock the boat, and to suppress any details which might create the wrong impression.

There wasn’t, in Bonn, the open parliamentary debate which should have preceded so a momentous an experiment as subsuming the national currency, proud symbol of post-war recovery, within a new, supranational currency, as yet unsupported by a new, supranational state.

Dissent was stifled: something more easily done in a system with party lists. Many Germans saw with indignation the herd mentality that had developed among their representatives.

It has become a commonplace of commentary on foreign affairs that Germany is failing to rise to the great responsibilities which now rest on her shoulders.

Again, one may argue that this is a good thing: that being undramatic is better than being over-dramatic: that all difficult questions should be left in the calm hands of Angela Merkel, who long ago had the ruthlessness to knife Kohl.

But this preference for a quiet life has its drawbacks too. For years, Wirecard was held up as a German success story, a rare example of a national tech champion which could beat the Americans at their own game.

German regulators declined to investigate persistent allegations of irregular accounting and the company frightened into silence anyone who suggested its figures were too good to be true.

Only a year ago, Merkel promoted Wirecard’s efforts to get a licence to operate in China.

The German press failed to expose the Wirecard scandal. That was left to a troublesome newspaper based in London, The Financial Times, which took a courageous, principled, long-term view of the story, and wanted to tell its readers what was actually going on. Those qualities are not only found in Germany.