What If The City of London Implemented Different Financial Regulations?

The Actual History

The City of London's transformation into a global financial powerhouse was largely shaped by a series of regulatory changes beginning in the 1980s. The watershed moment came on October 27, 1986, with the implementation of what became known as the "Big Bang" – a sweeping deregulation of financial markets under Margaret Thatcher's Conservative government. This pivotal reform abolished fixed commission charges and eliminated the separation between those who traded in securities (jobbers) and those who advised investors (brokers). It also removed barriers preventing foreign ownership of UK brokerages and banks, opening the door to international financial institutions.

Prior to the Big Bang, the City operated as a relatively closed club with antiquated practices. Trading was conducted face-to-face on the floor of the London Stock Exchange, and the financial sector was characterized by partnership structures with unlimited liability, which inherently limited risk-taking behavior. The reforms were designed to modernize London's financial markets, which had been losing ground to New York and Tokyo.

The deregulation proved transformative. Within months, venerable British merchant banks and brokerages were acquired by American, European, and Japanese financial institutions. Trading moved from the exchange floor to computer screens, and the City's physical landscape changed dramatically with the development of Canary Wharf. Employment in financial services soared, and London firmly established itself as Europe's premier financial center and a rival to New York.

The regulatory approach that defined this era was captured in the "light-touch" philosophy that continued through successive governments. This was formalized in 1997 when the incoming Labour government, under Tony Blair, created the Financial Services Authority (FSA) as a unified regulator operating at arm's length from government, with a principles-based approach rather than prescriptive rules.

This regulatory framework showed its vulnerabilities during the 2007-2008 global financial crisis. Northern Rock's collapse in 2007 became Britain's first bank run in over a century. The government was forced to nationalize or provide emergency support to major institutions including Royal Bank of Scotland and Lloyds Banking Group. The crisis revealed how light-touch regulation had allowed excessive risk-taking, inadequate capital reserves, and dangerous levels of leverage throughout the system.

In response, the UK substantially reformed its regulatory architecture. The FSA was abolished in 2013 and replaced with two new regulators: the Prudential Regulation Authority (PRA) under the Bank of England, focused on the stability of financial institutions, and the Financial Conduct Authority (FCA), concerned with consumer protection and market integrity. Capital requirements were substantially increased, and a ring-fence was established between retail and investment banking operations.

Despite these reforms, the City maintained its global prominence. By 2022, London still ranked second only to New York in global financial center indices, hosting over 250 foreign banks and managing nearly $10 trillion in assets. However, Brexit introduced new challenges, with some operations and thousands of jobs relocating to EU financial centers such as Frankfurt, Paris, and Dublin due to the loss of passporting rights for financial services.

The City's evolution over four decades represents a story of dramatic success in terms of growth and global status, but also one of periodic crisis and subsequent regulatory recalibration, with ongoing debates about whether the balance between innovation and stability has been appropriately struck.

The Point of Divergence

What if the UK had charted a fundamentally different course for financial regulation in the 1980s? In this alternate timeline, we explore a scenario where the Thatcher government, while still committed to modernizing the City of London, implemented a more structured regulatory framework rather than embracing wholesale deregulation.

Several plausible divergence points could have led to this outcome:

First, the 1984 collapse of Johnson Matthey Bankers (JMB), which required a Bank of England rescue, could have triggered greater caution. In our timeline, this was treated as an isolated incident. In this alternate reality, it could have been viewed as a warning sign about the dangers of rapid liberalization without appropriate safeguards, prompting a more measured approach to the planned Big Bang reforms.

Alternatively, the influential 1985 Gower Report on investor protection could have taken a stronger stance. Sir Alex Gower, tasked with reviewing financial regulations, might have recommended more robust consumer protections and institutional oversight mechanisms that were subsequently incorporated into the Financial Services Act 1986.

A third possibility involves international influence. The United States had implemented the Glass-Steagall Act in 1933, separating commercial and investment banking. If the UK had adapted similar principles rather than moving in the opposite direction, the regulatory landscape would have developed quite differently.

The most plausible divergence centers on the structure of the Securities and Investments Board (SIB), established in 1986. In our timeline, it was designed as a light-touch "self-regulating organization." In this alternate reality, it was instead established as a more powerful, centralized regulator with direct oversight responsibilities and explicit mandates for financial stability and consumer protection.

The key elements of this regulatory divergence would include:

Maintaining some separation between different types of financial activities, particularly between retail banking and more speculative investment operations
Implementing stronger capital requirements for financial institutions
Establishing more rigorous oversight of new financial products and innovations
Creating robust consumer protection mechanisms from the outset
Developing a more transparent approval process for mergers and acquisitions in the financial sector

These changes would not have prevented the modernization of the City nor closed it to international players, but would have established guardrails that fundamentally altered how the financial sector evolved over subsequent decades.

Immediate Aftermath

A More Measured "Big Bang"

The immediate impact of a more structured regulatory approach would have been a significantly different implementation of the Big Bang reforms between 1986 and 1990:

Selective Foreign Entry: Rather than the unrestricted entrance of foreign financial institutions, the alternate regulatory framework would have established a more deliberate approval process. American and Japanese banks would still have entered the London market, but with greater scrutiny of their business models and capitalization. By 1988, perhaps 30-40% fewer foreign takeovers would have occurred compared to our timeline.
Technological Transition: The shift from floor trading to electronic systems would have proceeded, but with mandatory testing periods and circuit breakers inspired by early market disruptions like the 1987 Black Monday crash. This would have slowed the technological transformation but potentially made it more stable.
Maintained Partnership Structures: Some of London's merchant banks and brokerages would have been encouraged to maintain their partnership models rather than converting wholesale to limited liability corporations, preserving the alignment of personal risk and decision-making that had characterized the City for centuries.

Political Dynamics

The Conservative government would have faced criticism from two directions. Free-market purists within the party, including some of Thatcher's closest advisors like Sir Alan Walters, would have objected to what they perceived as half-measures that failed to fully liberalize the market. Opposition Labour politicians, on the other hand, might have cautiously supported the more structured approach while arguing it didn't go far enough in protecting the public interest.

Margaret Thatcher, ever the pragmatist despite her ideological reputation, would likely have defended the balanced approach, particularly after the global stock market crash of October 1987 demonstrated the volatility of financial markets. This crisis, occurring just a year after the Big Bang, vindicated the more cautious regulatory stance in this timeline and potentially strengthened Thatcher's position as markets in London recovered more quickly than those with less robust safeguards.

Slower but More Stable Growth

The economic consequences between 1986 and the early 1990s would have been mixed:

Measured Expansion: The financial sector's contribution to UK GDP would have grown more slowly than in our timeline. By 1990, it might have represented 6-7% of the economy rather than the 8-9% it actually achieved.
Real Estate Development: The massive physical transformation of the London Docklands, particularly Canary Wharf, would have proceeded at a more measured pace. The 1992 bankruptcy of Olympia & York, the Canadian property company developing Canary Wharf, might have been avoided with a more stable expansion trajectory.
Employment Patterns: The explosive growth in financial sector employment would have been moderated. Rather than the creation of approximately 50,000 new jobs in the sector between 1986 and 1990, perhaps 30,000-35,000 would have materialized, but with greater stability and less dramatic bonus culture.

International Position

London would still have enhanced its position as a global financial center, but with some key differences:

Regulatory Reputation: The City would have developed a reputation as a well-regulated marketplace rather than the freewheeling center it became in our timeline. This might have attracted different types of financial business, with greater emphasis on asset management and less on exotic derivatives trading.
European Relations: The UK's financial regulatory approach would have aligned more closely with the measured liberalization occurring in continental European financial centers like Frankfurt and Paris. This could have fostered greater harmonization in European financial regulation well before the European Union began serious efforts in this direction in the 1990s.
Special Relationship: Relationships with American financial institutions would have remained strong, but London would not have become quite as attractive for the riskier aspects of U.S. banks' operations that sought to escape tighter domestic regulation.

Early Warning Systems

Perhaps most significantly, the stronger regulatory framework would have created more effective early warning systems for financial stability risks. When the small Bank of Credit and Commerce International (BCCI) collapsed in 1991 amid fraud allegations, regulators in this timeline would have had robust mechanisms to assess contagion risks and potentially identify similar vulnerabilities across the system.

By 1992, as the UK weathered the Exchange Rate Mechanism crisis, the financial sector in this alternate timeline would have been somewhat smaller but significantly more resilient than in our reality, setting the stage for a very different trajectory through the subsequent decades.

Long-term Impact

Altered Financial Innovation (1990s-2000s)

The more robust regulatory framework would have fundamentally shaped how financial innovation unfolded:

Derivatives Market Development: The explosive growth of over-the-counter derivatives would have occurred within more defined parameters. Regulators would have required greater transparency and risk disclosures, potentially leading to the earlier development of central clearing mechanisms that only emerged after the 2008 crisis in our timeline.
Securitization Practices: The securitization of mortgages and other loans would have developed under closer scrutiny. This wouldn't have prevented the creation of mortgage-backed securities, but might have limited the complexity of products like CDOs (Collateralized Debt Obligations) and CDO-squared instruments that became increasingly opaque in our timeline.
Hedge Fund Regulation: Alternative investment vehicles like hedge funds would have faced registration requirements and capital adequacy standards from earlier stages, rather than operating largely outside the regulatory perimeter until after the 2008 crisis.

This environment would have fostered a different type of financial innovation – one more focused on managing risk appropriately rather than circumventing regulatory frameworks.

Banking Structure Evolution

The organizational structure of British and international banks operating in London would have evolved distinctively:

Functional Separation: Even without a formal Glass-Steagall type separation, the regulatory framework would have enforced clearer divisions between retail banking, commercial lending, asset management, and trading activities. This might have naturally limited the creation of unwieldy "universal banks" that proved difficult to manage and supervise.
Compensation Practices: With greater regulatory attention to incentive structures, the extreme bonus culture that characterized the City in our timeline would have been moderated. By the early 2000s, greater emphasis might have been placed on long-term performance metrics and clawback provisions for executives and traders whose decisions later proved detrimental.
Foreign Bank Operations: International banks would still have established significant London operations, but these would have been structured differently. Rather than using London as a lighter-touch regulatory jurisdiction for riskier activities, foreign banks would have integrated their London operations more seamlessly with global risk management systems.

The Road Not Taken: The 2008 Financial Crisis

The most dramatic divergence occurs around the 2007-2008 global financial crisis:

Early Warning Signals: The stronger regulatory system would have identified growing risks in the mortgage market earlier. As early as 2005-2006, UK regulators might have imposed stricter standards on mortgage lending and required greater transparency in securitization markets.
British Banking Resilience: British banks would have entered the crisis with stronger capital positions. Northern Rock's aggressive funding model, relying heavily on short-term wholesale markets rather than stable deposits, would likely have been constrained years earlier. While some institutions would still have faced difficulties, catastrophic failures requiring full nationalization might have been avoided.
Global Position: London-based institutions and regulatory authorities would have been better positioned to cooperate internationally when the crisis hit. Rather than being seen as part of the problem, the UK regulatory model might have been viewed as a potential part of the solution, enhancing British influence in the post-crisis regulatory redesign.
Economic Impact: The UK would still have experienced recession, but potentially a shallower one. The massive bailouts that added approximately 10% to the UK's national debt might have been significantly smaller, giving the government more fiscal flexibility in the recovery period.

Brexit and Financial Services (2016-2025)

The EU referendum result in 2016 would have occurred in a different financial context:

Regulatory Equivalence: With a forty-year history of more structured regulation, the UK would have entered Brexit negotiations with financial regulations already more closely aligned with European norms. This could have facilitated easier discussions about regulatory equivalence for financial services post-Brexit.
City's Global Position: By 2016, the City would have been recognized internationally for combining innovation with stability rather than aggressive deregulation. This might have altered the dynamics of post-Brexit financial services negotiations, potentially preserving more of London's European business.
Domestic Politics: The perception of the financial sector among the British public would have been fundamentally different. Without the excessive behaviors that characterized the pre-2008 period in our timeline, there might have been less popular anger toward bankers and potentially a different political discourse around Brexit itself.

Technological Transformation

The emergence of fintech and digital finance would have unfolded differently:

Regulatory Sandbox: The UK might have pioneered the concept of regulatory sandboxes for financial innovation even earlier than 2015 when it actually did so in our timeline. With established mechanisms for evaluating new financial products, British regulators could have created controlled environments for testing digital innovations as early as the mid-2000s.
Cryptocurrency Approach: By the time Bitcoin emerged in 2009, UK regulators would have had well-established frameworks for evaluating novel financial instruments. This might have led to earlier engagement with cryptocurrency innovations rather than the reactive stance most regulators adopted in our timeline.
Open Banking: The UK's implementation of Open Banking standards, which began in 2018 in our timeline, might have started years earlier in this alternate reality. The balanced approach to innovation and consumer protection would have created natural opportunities for expanding competition while maintaining system stability.

Present Day (2025)

By 2025 in this alternate timeline, London would remain one of the world's premier financial centers, but with a distinctly different character:

Global Regulatory Leadership: Rather than the cyclical pattern of deregulation followed by crisis and re-regulation, the UK would have established a reputation for consistent, effective oversight. International standard-setting bodies like the Financial Stability Board would likely have adopted more elements from the British approach.
Balanced Economic Structure: The UK economy would be less dominated by financial services than in our timeline. With steadier growth in the sector and fewer boom-bust cycles, other industries might have maintained stronger positions, particularly manufacturing and technology.
Social Impact: Income inequality, which was significantly exacerbated by financial sector compensation practices in our timeline, might be less pronounced. The regional disparities between London and other parts of the UK could be less severe, potentially altering the political landscape.
Crisis Resilience: Facing the economic challenges of the COVID-19 pandemic and subsequent inflation, the UK financial system would have demonstrated greater resilience, potentially requiring less extraordinary intervention from the Bank of England.

The City of London would still be recognizably a global financial powerhouse, but one built on a foundation of balanced regulation rather than cycles of excess and restraint – demonstrating that financial innovation and proper oversight need not be mutually exclusive.

Expert Opinions

Dr. Catherine Montgomery, Professor of Financial History at the London School of Economics, offers this perspective: "The light-touch regulatory approach adopted in the 1980s created a dynamic but ultimately unstable financial ecosystem in London. In an alternate timeline with more structured regulation, we would likely have seen the emergence of different competitive advantages. Rather than competing primarily on regulatory laxity, London might have distinguished itself through superior risk management practices and market integrity. The financial sector would probably be somewhat smaller as a percentage of GDP, but likely more sustainable and less prone to the dramatic cycles of boom and bust that have characterized the past four decades."

Sir William Blackstone, former Deputy Governor of the Bank of England and visiting professor at Oxford University, suggests: "The counterfactual of a more regulated Big Bang presents fascinating possibilities. We must remember that regulation isn't simply a constraining force – effective regulation creates the confidence that allows markets to function efficiently. Had the UK implemented a more balanced approach from the beginning, we might have avoided the costly process of learning regulatory lessons through successive crises. Perhaps most significantly, the relationship between the financial sector and the broader public might be fundamentally different today. Without the perception that banks privatized profits while socializing losses during the 2008 crisis, the political backlash against financial institutions might never have reached the intensity that contributed to phenomena like Brexit."

Dr. Nirmala Patel, Research Director at the Global Financial Governance Institute, provides an international perspective: "From a comparative standpoint, this alternate regulatory path would have positioned London uniquely in the global financial architecture. The United States maintained stricter regulations in some areas but had significant gaps in others, while continental European centers often erred toward excessive bureaucracy. A London that balanced innovation with proper oversight could have created a 'goldilocks zone' in global finance – not too hot, not too cold. This might have attracted different types of institutional capital, particularly from sovereign wealth funds and pension systems seeking long-term stability. The ripple effects would have extended to emerging market financial centers from Singapore to Dubai, which largely modeled themselves on the actual London approach. A different City of London might have meant a different template for global financial development."