‘Big Bang 2’ reforms expose the City’s weaknesses

The writer’s latest book is ‘Agent Twister’, a biography of John Stonehouse, co-written with Keely Winstone

Among the slew of tax increases in the chancellor’s Autumn Statement, one substantial tax cut stood out as going against the trend. The five percentage point reduction in the 8 per cent surcharge imposed on larger banks’ profits in 2015 following the great financial crisis will cost the exchequer more than £1bn a year.

With a £55bn hole to fill and a strong case for investment in skills and the public sector, it must have been a close call. And, given their profits from higher interest rates and market volatility, it’s not as if the big banks needed 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 eased through a revision to Solvency II, an EU-inspired regulation. After 15 years out in the political cold, the package was welcomed by the industry as a sign of glasnost.

But this is no time for celebration. These tactical reforms are more a sign of the City’s weakness than of its strength.

The financial services industry remains, of course, a driver of the UK economy. It contributes more than 10 per cent of total tax receipts, employs a million people and is one of the few major British industries to show a balance of trade surplus. London dominates global trading in derivatives, foreign exchange and parts of the bond market. In a growth-starved economy, such successes need to be nurtured — particularly when structural weaknesses in the industry are also evident.

The City is not going to dribble away, 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 migration of EU jobs have led to 76,000 financial services jobs vanishing since September 2019, according to the think-tank New Financial’s recent paper. This is superficial and not yet serious damage but a much more dangerous loss of position in equity-related business, once the cornerstone of corporate UK, is already under way.

The value of equities listed in Paris, once a distant runner-up in the race to be pre-eminent financial capital, is now nudging that of London. Like Paris, Amsterdam has also been a beneficiary of a migration in share trading after Brexit. For different regulatory and accounting-related reasons, British pension funds and insurance companies, traditional guardians of the corporate gate, are seriously underweight in equities — especially British equities.

In a partly related falling off, London’s global share of initial public offerings has dropped from 25 per cent to 5 per cent in less than two decades. These IPOs are absolutely critical to prospects in the wider economy: it tends to be small and medium-sized businesses that list on public exchanges and create future growth.

Once, all British companies seeking a public listing did so in London. Now, more and more growth companies in the technology and life sciences industries are choosing to do so on Nasdaq. Listing overseas does not necessarily mean that the whole business will eventually go offshore but in the long run it might. And when the economy needs to foster every source of growth, that’s a problem.

Without getting careless — we don’t need a return of light-touch regulation — there is little that governments can do to resist the inevitable. Tweaks to London’s listing rules may help; so might abolishing Mifid II, an EU regulation implemented in 2018. Intended to increase transparency for investors by separating the money asset managers paid to brokers into research and execution streams, its measures combined a worthy objective with unintended consequences.

The big Wall Street brokers absorbed most of the research costs and squeezed smaller rivals by predatory pricing. This led to a reduction in research coverage of small and mid-cap companies, and market liquidity in this area dried up. The void in London encouraged new British companies 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 bolted to New York to where the capital is. It’s a long way back.

As a result of decisions taken a long time ago, tax cuts or not, there is little to be done. Hunt’s reforms have been optimistically trailed as Big Bang 2 but they are nothing like as momentous as 1986. Rather, this is a partial response to intensifying foreign competition in a strategically important industry. The real Big Bang encouraged American domination of the capital markets, leaving few British institutions on the buy or sell side able to act in the national interest. Rather than risk losing out to overseas financial centres, the government has stepped in to help an industry that can’t help itself.