1.2.4 Big Bang and the rise of the investment banks
The second major development that radically altered the operation of the financial services industry in recent decades was the so-called ‘Big Bang’ in October 1986.
The phrase relates to the major changes to firms engaged in the markets that underpin the financial services business – including the stock market, the government securities market and the corporate bond markets. Prior to Big Bang, those firms engaged in market-making in these investment products, the so-called jobbers, had to be separate from the broking firms, the stockbrokers that marketed the products to investors. So the trade in shares and securities involved two separate groups of firms working together. During this time, there was also a clear demarcation between the activities of the Stock Exchange and the rest of the financial services industry – particularly the banks.
In the 1980s, the Conservative government reformed the practice of charging agreed minimum commission rates for transactions in securities. This abolition of minimum commission rates took place in 1986. The Stock Exchange firms, however, sought a quid pro quo (a trade-off) for the loss of these minimum commissions.
In response to this pressure – and to concerns in the government about how the opening up of the financial markets to overseas competition might adversely affect the Stock Exchange – the government introduced a wide-ranging series of changes to the financial services industry that became known as Big Bang.
Big Bang permitted the dealing (jobbing) and broking elements of financial services business to be conducted within the same firm. Thus firms could act in a dual capacity both as agents to investors and as dealers on their own account. This was provided that safeguards – known as Chinese walls – were put in place within the firms. These defined the constraints on the information that could pass from brokers to dealers within the same firm. These walls were in place to ensure that the broking arms of the firms acted in the best interests of their customers when conducting business, rather than conspiring with their market-making colleagues – and against their customers’ interests.
Big Bang also changed the ownership rules of member firms of the Stock Exchange. These had previously been unlimited partnerships of either brokers or jobbers. Now ownership was opened up to external limited-liability companies.
Big Bang not only changed the organisation of business in the City of London, having knock-on effects on the way financial services business was conducted with the public, but also transformed the nature of City institutions. Within a few years, virtually all the exchange’s jobbing and broking firms together with most of the City’s merchant banks had been acquired by financial firms – predominantly US and other overseas banks. So Big Bang resulted in a huge wave of investment in the City of London by overseas financial firms – a development which saw much of the City become dominated by overseas owners (mainly the US investment banks). The consequences of Big Bang therefore were influential in furthering the trend to globalisation in the industry.