LSE – A New ‘Big Bang’ for the City of London? Wrong Idea.

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U.K. Chancellor of the Exchequer Rishi Sunak wants the City of London—until last month the undisputed financial capital of Europe—to prosper. That is understandable: The former Goldman Sachs banker and hedge-fund manager, who was also an ardent Brexit supporter from the get-go, doesn’t want London’s financiers to despair at the loss of the huge European markets from which they are legally barred, at least for now.

So Sunak hopes that leaving the European Union will even strengthen “the U.K.’s position as a globally pre-eminent financial center,” as he told Parliament on Monday.

The reason, he said, is that the country will be able to do things “differently and better” in terms of financial regulation. The same day, in a newspaper interview, Sunak used a reference from the Margaret Thatcher era: People are free to call the reforms he has in mind “Big Bang 2.0 or whatever,” he said.

This is the name given to what happened on the day in October 1986 when sweeping reforms were implemented in the

London Stock Exchange,

with the abolition of a string of regulations that had constrained financial transactions and stifled competition, as well as the opening of trading to a range of new actors, including foreign ones.

The problem with the Big Bang reference today is that it is misleading, dangerous, and self-defeating.

It is misleading because the world of finance today has nothing to do with what it was 35 years ago, to say the least. Thatcher’s Big Bang was all about opening London to the rest of the world (including to EU financial players), whereas today’s story is about managing the barriers erected by Brexit between Europe’s finance capital—London—and its financial base—the EU.

Globalization has since swept the world of finance, and the City today is subjected to regulations that the U.K. government constantly agreed with—after approving every single financial piece of legislation enacted by the EU in the last 10 years.

The U.K. will now have the opportunity to devise and tailor its own rules without having to agree with other governments. But there is little bang to expect here, and it’s unlikely to be big.

The second problem is that, taken to the letter, the Big Bang reference is dangerous. One of the reasons for the 2008 financial crisis is that regulators had given up in their attempt to understand and master the complexities of financial innovation running amok, after endless creativity had been encouraged by the deregulation of previous decades.

Another is that banks had taken to playing loosely with their depositors’ money, with the result that quite a few of them had to be rescued by taxpayers’ money. Regulations implemented since then, notably on banks’ capital buffers, have made the system more resilient—as we have seen this year through the Covid-19 pandemic. Is now really the time to reverse course?

Finally, talking about a new Big Bang is, for the U.K., self-defeating. The country must enter talks with the EU about a memorandum of understanding on financial services, which were left out of the trade deal painstakingly concluded on Dec. 24. The hope for U.K.-based financial players is that the European Commission will grant them “equivalence” decisions in several dozens of segments of activity, if it estimates that U.K. rules are roughly similar to EU ones.

That would allow U.K. firms to keep operating in the EU, their main market. But Brussels is withholding the decisions for now, waiting to form an idea of the direction the U.K. will take in regulatory matters. There is nothing to worry EU policy makers like the apparent pledge by a U.K. minister to keep deregulating finance. At the very least, the memorandum-of-understanding conversations are off to a bad start.

“Big Bang 2.0 or whatever?” Next time Sunak talks about this, it may be wiser for him to elaborate on the “whatever” than to invoke the Thatcherite Big Bang myth.

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