“BIG BANG” AND CITY REGULATION
| Published date | 01 January 1988 |
| Date | 01 January 1988 |
| Author | L.C.B. Gower |
| DOI | http://doi.org/10.1111/j.1468-2230.1988.tb01741.x |
THE
MODERN LAW REVIEW
Volume
51
January
1988
No.
I
“BIG BANG” AND CITY REGULATION
“BIG Bang” in the title of this lecture is not used in its astro-
physical sense. It refers, of course, to the upheaval and
transformation that, since the summer of
1983,
have taken place in
what it is now fashionable to call our “financial services industry”
(but which
I
shall here refer to, without any geographical
connotations, as “the City”).
I
was asked to give “a personal
account” of these events and their consequences and that
is
all this
is.
BIG BANG
The sort
of
transformation that has occurred in the City is not
unique to it. All that is unique is that here most of it has happened
hastily in four years whereas in other major financial centres it has
happened gradually over
50
plus. Everywhere, over the past
50
years, the types of investment and of investment business have
changed radically. In particular investments have become immensely
more diversified and sophisticated and investment businesses inter-
related and international rather than discrete and domestic. This
breaking down of barriers between one class of investment business
and another has led to the growth of large,
well
capitalised
conglomerates providing a range of financial services. In adjusting
to this, most financial centres have had to overcome difficulties.
The main difficulty peculiar to the United Kingdom has been that
despite a remarkable freedom from inhibiting
legal
regulation (such
as the Glass-Steagall Act of the United States) there have been
restrictive rules of trade and professional associations designed to
protect the vested interests of their members. Pre-eminent among
these were the rules of The Stock Exchange. These prohibited
member firms from operating as limited companies, forbade outside
bodies from obtaining any substantial financial interest in them,
and insisted on “single capacity”-the separation of market-makers
(jobbers) trading only as principals from brokers trading only as
agents and charging fixed minimum commissions. Since, in contrast
with countries, such as the United States and, to a lesser extent,
Japan,
we
lacked large over-the-counter markets in domestic
securities, membership of The Stock Exchange was essential to a
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THE
MODERN
LAW
REVIEW
[Vol.
51
fully-fledged financial supermarket
,
but was unobtainable because
of its rules.
This, however, did not mean that foreign securities firms were
not operating in London. On the contrary there had been an
increasing influx of foreign institutions, especially American and
Japanese, some of which were sufficiently large and powerful to
buy up, if they had been allowed to, every stockbroker, stockjobber
and merchant bank in the country without its making any serious
dent in their resources. What principally attracted them here was
not the United Kingdom domestic securities’ market, from which
they were largely excluded because of The Stock Exchange rules,
but the so-called Eurobond (and later Euro-equity) market. This
somewhat amorphous market had no fixed location or trading
floor. It was, and is, an international, 24-hour, over-the-counter
market conducted by telephone or telex and mainly between
professionals. The value of securities traded on it was and is
enormous-far greater than that of the London and New York
Stock Exchanges combined. In
so
far as there was any control over
its operations, this was by some measure of self-regulation by a
trade association-the Association of International Bond Dealers-
which was located in Zurich. But, for some reason, the centre of
its operations came to be London.
I
say “for some reason”
because,
so
far as I am aware, no one has researched the reasons
why this immensely valuable asset came to be located here. It was
clearly not because
we
had left it largely unregulated, for other
European centres had done likewise.
Whatever the reasons may have been, the fact was that while the
United Kingdom had ceased to be a major manufacturing country,
London thanks particularly to the Euro-market was still a major
international financial centre and the national interest demanded
that it remained one. But it was one which had been slow fully to
adapt to changing circumstances. And it was a divided centre, with
the major international business dominated by well-capitalised
American, Japanese and Swiss institutions and the smaller domestic
market precariously dominated by under-capitalised British firms
but subject to increased competition from the Americans and
Japanese. For, despite the Stock Exchange rules, foreign institutions
were not wholly excluded even in regard to United Kingdom listed
securities. And many of these were also listed on the New York
Stock Exchange and some in Tokyo-indeed it is said that, in
value, more ICI shares are traded as American Depositary Receipts
in New York than in London-and at lower cost.
In
1979
two relevant events of major importance occurred. The
first was the reference by the Director-General of Fair Trading of
the Stock Exchange Rule Book to the Restrictive Practices Court.
This action, though in the long-term benign, had unfortunate short
term consequences since it understandably made The Stock
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