What If London Implemented Different Financial Regulations After Big Bang?

The Actual History

On October 27, 1986, the London Stock Exchange underwent a revolutionary transformation known as the "Big Bang." This watershed moment, orchestrated under Margaret Thatcher's Conservative government, dramatically deregulated Britain's financial markets and fundamentally altered the landscape of global finance.

Before the Big Bang, the London Stock Exchange operated as a relatively clubby, antiquated institution. Trading was conducted face-to-face on the exchange floor, with rigid separation between brokers (who acted as agents for clients) and jobbers (who made markets in securities). Fixed minimum commissions were mandatory, foreign ownership of British brokerages was restricted to 29.9%, and trading hours were limited. These constraints had caused London to lose ground to more dynamic financial centers, particularly New York.

The Big Bang abolished these restrictive practices through several key reforms:

Elimination of fixed commissions: Brokerages could now compete on price, introducing negotiable commission structures.
Removal of the broker-jobber distinction: Firms could now act as both brokers and dealers.
Introduction of electronic trading: The traditional trading floor was gradually replaced by screen-based systems.
Lifting of foreign ownership restrictions: International firms could now fully own British securities firms.

The results were immediate and transformative. Foreign banks rushed to acquire British financial institutions. American giants like Goldman Sachs, Morgan Stanley, and Merrill Lynch established major London operations, as did Swiss, German, and Japanese institutions. Traditional British merchant banks like S.G. Warburg, Kleinwort Benson, and Morgan Grenfell were acquired by foreign entities.

The City of London was physically transformed as well, with the development of Canary Wharf creating a new financial district east of the traditional City. The modernist skyscrapers housing these financial institutions became potent symbols of London's renewed financial might.

Regulatory oversight shifted with the creation of the Securities and Investments Board (later reformed as the Financial Services Authority in 1997), which implemented a principles-based regulatory approach rather than the prescriptive, rules-based system favored in the United States. This "light touch" regulation became a hallmark of London's appeal to global financial institutions.

By the 1990s and 2000s, London had reestablished itself as a premier global financial center alongside New York. The financial services sector grew to account for approximately 7% of UK GDP, with the broader financial and professional services ecosystem representing around 14%. The City became Europe's dominant financial hub, handling approximately 70% of Eurobond trading and becoming the world's largest center for foreign exchange trading, cross-border bank lending, and international insurance.

However, this spectacular growth came with significant costs. Income inequality in the UK widened considerably. The economy became increasingly dependent on financial services, creating regional imbalances as London and the Southeast prospered while manufacturing regions struggled. When the 2008 global financial crisis struck, the UK was particularly vulnerable, with the government forced to bail out major institutions like Royal Bank of Scotland and Lloyds Banking Group at enormous public expense.

In the aftermath of the crisis, regulatory reforms were implemented through the Financial Services Act 2012, splitting regulatory responsibilities between the Prudential Regulation Authority and the Financial Conduct Authority. Despite these changes, the fundamental structure of London's financial services industry remained largely intact, continuing to play an outsized role in Britain's economy through to the present day.

The Point of Divergence

What if London had implemented a more stringent regulatory framework following the Big Bang deregulation? In this alternate timeline, we explore a scenario where the Thatcher government, while still pursuing financial liberalization, adopted a more robust regulatory approach to accompany the structural changes in Britain's financial markets.

This divergence could have manifested in several plausible ways:

First, the government might have established a stronger, more independent regulatory body from the outset, rather than the relatively industry-friendly Securities and Investments Board. This hypothetical "Financial Markets Authority" could have been granted greater statutory powers, more substantial resources, and a clearer mandate to protect market integrity and financial stability, rather than primarily focusing on promoting London's competitiveness.

Alternatively, the Bank of England might have retained and strengthened its supervisory role over the banking sector, rather than seeing these powers diluted and eventually transferred to the Financial Services Authority in 1997. A more empowered central bank, alongside rigorous securities market regulation, could have created a more balanced regulatory ecosystem.

Another possibility involves the adoption of specific structural safeguards that other jurisdictions were implementing or considering during this period. For instance, Britain might have maintained some version of the broker-dealer separation (similar to the Glass-Steagall provisions still operating in the United States at that time) or implemented stronger capital requirements for financial institutions engaging in both commercial and investment banking activities.

The catalyst for this regulatory divergence could have stemmed from several sources. The 1987 stock market crash, occurring less than a year after the Big Bang, might have prompted a more cautious regulatory approach. Alternatively, the political calculations within the Conservative Party could have shifted if influential figures like Nigel Lawson (Chancellor of the Exchequer from 1983 to 1989) had advocated for stronger guardrails to accompany deregulation.

Perhaps the most plausible scenario involves a different response to early warning signs of instability. The collapse of Barings Bank in 1995 due to unauthorized trading by Nick Leeson exposed vulnerabilities in risk management and oversight. In our timeline, this led to limited regulatory responses; in the alternate timeline, it might have prompted a comprehensive reassessment of the regulatory framework, implementing reforms that otherwise wouldn't emerge until after the 2008 financial crisis.

While this alternate timeline still features a modernized, internationally competitive London financial center, the "light touch" regulatory approach that defined the actual history would be replaced by a more balanced model—one that liberalized market structures while maintaining robust oversight of financial institutions and their activities.

Immediate Aftermath

Initial Market Reaction and Adaptation

The immediate response to a more substantial regulatory framework would likely have been mixed, creating both challenges and opportunities for London's financial sector. Foreign banks and securities firms would still have entered the market, attracted by London's timezone advantage, language, legal system, and talent pool, but their expansion strategies would have adapted to the more rigorous regulatory environment.

In the first 12-18 months following the divergence, some financial institutions might have expressed public disappointment or threatened to limit their London operations. Notably, American investment banks like Goldman Sachs and Morgan Stanley, accustomed to the relatively prescriptive but often navigable U.S. regulatory system, would have adjusted their European strategies. Rather than concentrating overwhelmingly in London, they might have distributed their European operations more evenly between London, Frankfurt, and Paris.

The pace of mergers and acquisitions in the financial sector would have slowed compared to our timeline. Traditional British merchant banks like Kleinwort Benson, S.G. Warburg, and Morgan Grenfell might have maintained their independence longer, perhaps forming strategic alliances rather than being fully acquired by foreign institutions. This would have preserved a distinctly British presence in investment banking that largely disappeared in our timeline.

Structural Evolution of the Financial System

By the early 1990s, the structural differences between this alternate London financial sector and our timeline would become increasingly apparent:

Enhanced Capital Requirements: Financial institutions operating in London would maintain higher capital buffers against potential losses, particularly for trading activities. This would moderate the explosive growth in certain high-risk, high-return business lines like proprietary trading and complex securitization.

Cultural and Governance Requirements: The hypothetical Financial Markets Authority would have emphasized governance standards, requiring financial institutions to implement robust internal controls, risk management systems, and accountability mechanisms.

Transparency Mandates: Stronger disclosure requirements for both market participants and financial products would have created a more transparent marketplace, particularly regarding derivatives and structured products.

Development of Compliance Infrastructure: A substantial compliance industry would have developed earlier than in our timeline, creating specialized legal, consultancy, and technology services focused on regulatory adherence.

John Major's Government Response

When John Major succeeded Margaret Thatcher as Prime Minister in November 1990, his government would have faced a different financial landscape. Major, generally considered more pragmatic and less ideological than Thatcher, would likely have maintained the more balanced regulatory approach.

The UK's forced exit from the European Exchange Rate Mechanism (ERM) on "Black Wednesday" (September 16, 1992) would still have occurred, as this was primarily driven by macroeconomic factors and currency speculation. However, the aftermath might have differed. With a more resilient financial sector less prone to excessive risk-taking, the Major government could have focused more on industrial policy and regional development rather than primarily cultivating financial services growth.

International Regulatory Influence

By the mid-1990s, Britain's more balanced regulatory model would have begun influencing international financial regulation:

European Financial Regulation: Rather than consistently advocating for lighter regulation within the European Union, British representatives might have promoted their "balanced approach" model, potentially influencing the development of EU financial directives.

Basel Committee Negotiations: In international forums like the Basel Committee on Banking Supervision, UK representatives would have supported more substantial capital requirements and risk management standards, potentially strengthening the Basel II framework that was developed during this period.

The Barings Bank Crisis Response

The collapse of Barings Bank in 1995 would have unfolded differently in this alternate timeline. With stronger risk management requirements already in place, Nick Leeson's unauthorized trading might have been detected earlier or limited in scope. Even if the collapse still occurred, the regulatory response would have differed significantly.

Rather than treating it as an isolated incident requiring limited reforms, regulators would have viewed it as confirmation of their approach, perhaps further strengthening governance requirements and personal accountability for senior executives. This would have contrasted with our timeline, where the full implications of the Barings collapse for systemic risk were not fully addressed until after the 2008 financial crisis.

New Labour's Financial Policy

When Tony Blair's New Labour government came to power in 1997, their approach to financial regulation would have diverged significantly from our timeline. Instead of creating the Financial Services Authority with its "light touch" mandate, Chancellor Gordon Brown might have further refined the existing regulatory system, perhaps consolidating agencies while maintaining their robust oversight powers.

The controversial "prawn cocktail offensive," where Labour courted City financiers to gain their support, would have been less necessary as the financial sector had already adapted to a more balanced regulatory environment. This would have allowed New Labour to maintain a more independent relationship with financial interests, potentially influencing their broader economic policies.

Long-term Impact

Financial Sector Development

By the early 2000s, the longer-term consequences of more robust financial regulation would have become increasingly apparent across multiple dimensions of Britain's economy and society.

Modified Growth Trajectory

London would still have emerged as a leading global financial center, but with notable differences from our timeline:

Selective Growth: Rather than expanding across all financial activities, London would have developed particular strength in areas where robust regulation added value—institutional asset management, corporate advisory services, and sophisticated insurance markets.
Infrastructure Investment: The physical transformation of London's financial districts would have proceeded more deliberately. Canary Wharf would still have developed, but perhaps with a more diverse mix of industries rather than being overwhelmingly dominated by financial services.
Employment Patterns: The financial sector would have created fewer but more stable jobs. Total employment in financial services might have reached 5-6% of GDP rather than 7-8%, but with less volatility during economic downturns.

Compensation and Talent Allocation

The notorious bonus culture that emerged in our timeline would have developed differently:

Moderated Compensation: While financial sector compensation would still have exceeded other industries, the extreme disparity observed in our timeline would have been moderated by regulatory constraints on risk-taking and bonus structures.
Talent Distribution: With somewhat reduced financial sector compensation, other industries would have attracted a greater share of top talent. Technology, advanced manufacturing, and other productive sectors might have benefited from a more balanced distribution of the UK's most capable graduates.
Social Perception: The public perception of bankers and financial professionals would likely have been less negative, potentially reducing the social tensions that emerged from financial sector excess in our timeline.

The 2008 Financial Crisis: A Different Experience

The most profound divergence would manifest during the 2008 global financial crisis. While no regulatory system could have entirely prevented a crisis with such deep global roots, Britain's experience would have differed significantly:

Reduced Domestic Vulnerabilities

Bank Balance Sheets: British banks would have entered the crisis with stronger capital positions and less exposure to high-risk assets. Northern Rock's aggressive mortgage lending model might never have emerged or would have been constrained by regulators.
Derivatives Exposure: UK financial institutions would have maintained more transparent and better-collateralized derivatives positions, reducing counterparty risk during market stress.
Housing Market: Mortgage lending standards would have remained more conservative, potentially moderating the UK housing bubble that contributed to financial instability.

Crisis Response Capabilities

When the crisis struck, the UK authorities would have had better tools and information to respond:

Early Warning Systems: More robust monitoring of systemic risks would have provided earlier signals of emerging problems.
Resolution Frameworks: Pre-established mechanisms for managing failing institutions would have enabled more orderly interventions.
International Coordination: Britain's regulators, having established themselves as credible voices for financial stability, would have wielded greater influence in coordinating the international crisis response.

Economic Impact

The economic consequences would still have been severe but meaningfully mitigated:

Fiscal Costs: Government bailouts would have been smaller and potentially structured to provide better taxpayer protection. The £45 billion Royal Bank of Scotland rescue might have been avoided entirely or substantially reduced.
Recession Severity: The 2008-2009 recession would still have occurred but might have been less severe in the UK, perhaps closer to a 3-4% GDP contraction rather than the 6% experienced in our timeline.
Recovery Pattern: The economic recovery might have been more balanced across regions and sectors, rather than the London-centric, services-led pattern that emerged in our timeline.

Post-Crisis Political Economy

The different experience of the financial crisis would have reshaped British politics in fundamental ways:

Austerity Politics

The Cameron-Osborne austerity program implemented after 2010 might have been less severe with a smaller fiscal impact from the crisis:

Public Services: With reduced pressure on public finances, cuts to local government, policing, and social services might have been less drastic.
Infrastructure Investment: Greater fiscal capacity might have permitted continued infrastructure investment through the 2010s, addressing regional economic imbalances more effectively.
Political Narrative: The political narrative around austerity would have been significantly altered, potentially reducing the polarization that characterized British politics in the 2010s.

The Road to Brexit

Perhaps most significantly, the altered financial regulatory landscape might have influenced the Brexit referendum outcome:

EU Relationship: With a financial regulatory model already distinct from but compatible with EU approaches, the financial sector would have had less incentive to oppose EU financial regulations.
Public Sentiment: Without the extreme contrast between financial sector bailouts and public service austerity, public resentment toward "elites" might have been somewhat moderated.
Political Calculations: Key political figures might have calculated differently. For instance, Boris Johnson, with ties to the City, might have found different political positioning without the same degree of anti-financial establishment sentiment to harness.

While it's impossible to definitively claim the Brexit vote would have gone differently, the 52-48 margin was narrow enough that these altered conditions could potentially have tipped the balance toward Remain.

Global Financial Architecture

By 2025, this alternate timeline would feature a somewhat different global financial system:

Regulatory Standards: Global minimum standards for financial regulation would likely be higher, influenced by Britain's "balanced model" rather than being primarily shaped by U.S. approaches.
Financial Centers: While New York and London would remain the two leading global financial centers, their dominance might be slightly reduced, with a more multipolar system including stronger roles for centers like Frankfurt, Paris, Tokyo, and Singapore.
Financial Innovation: Financial innovation would still occur but might follow different patterns—more focused on efficiency, sustainability, and risk management rather than regulatory arbitrage and complexity for its own sake.
Technological Integration: The integration of technology into finance (fintech) might have proceeded more deliberately, with greater emphasis on operational resilience and systemic safety alongside innovation.

Expert Opinions

Dr. Helena Thornton, Professor of Financial History at the London School of Economics, offers this perspective: "The conventional wisdom that stronger regulation inevitably hampers financial sector competitiveness is contradicted by historical evidence. In this alternate timeline, London might have sacrificed some short-term growth during the 1990s bubble period, but would have built a more sustainable competitive advantage based on stability and institutional quality. The evidence from other sectors suggests that well-designed regulation often drives innovation in more productive directions rather than simply constraining it. London's alternate regulatory path would likely have created a financial sector that better served the broader economy while remaining globally competitive."

Sir Jonathan Reynolds, former Deputy Governor for Financial Stability at the Bank of England, presents a more nuanced view: "The counterfactual of stronger post-Big Bang regulation represents a fascinating 'middle path' between the American and Continental European models. The U.S. maintained more structural regulations like Glass-Steagall until 1999, while implementing detailed rules-based oversight. Continental Europe, particularly Germany, maintained close relationships between banks, industry, and regional governments. Britain's alternate path might have combined the openness of the Big Bang with more robust safeguards, potentially creating a distinct regulatory ecosystem that balanced innovation and stability better than either the American or European approaches. When we consider the costs of the 2008 crisis—not just the direct bailout expenses but the long-term economic scarring and political consequences—the value of this alternate approach becomes particularly compelling."

Professor Akira Yoshimoto of the Tokyo University Department of International Finance provides an East Asian perspective: "Japan's experience with financial deregulation in the 1980s followed by the collapse of our asset price bubble offers instructive parallels to Britain's Big Bang. In Japan, insufficient regulatory oversight contributed to excessive risk-taking that ultimately undermined economic growth for decades. Had London implemented a more balanced regulatory approach while still modernizing its financial markets, it might have avoided both Japan's stagnation and the extreme boom-bust cycle experienced in the actual timeline. Most significantly, a more resilient British financial system might have altered the global response to the 2008 crisis, perhaps encouraging more emphasis on financial sector reform rather than primarily monetary stimulus, with profound implications for global capital allocation and economic development."