SMALL INVESTORS AFTER FINANCIAL DEREGULATION: New evidence from the 1980s City of London post-‘Big Bang’

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Date:
30 Mar 2016

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Despite Conservative rhetoric promising a share-owning democracy and popular capitalism, individual investors’ share of equities declined in the 1980s – from 28.2% in 1981 to 21.3% in 1989. That is one of the findings of research by Amy Edwards, to be presented at the Economic History Society’s 2016 annual conference in Cambridge.

Her study explores whether ‘Big Bang’ – the 1986 deregulation of the City of London –really did led to the promised increase in competition and a better deal for small investors. In fact, she shows, traditional financial elites maintained and even expanded their position in private investor markets in the aftermath of Big Bang. The small investor became increasingly restricted by the range of products on offer from a small but dominant group of financial conglomerates.

It is 30 years this October since the deregulation of the City of London, known as ‘Big Bang’ and we are still feeling its effects today. The financial services landscape was permanently changed by the Thatcher administrations, amid rhetoric of competition, choice and a better deal for the small investor.

Deregulation was largely portrayed as an attack on a City culture of old – a move away from the ‘old boys’ networks of influence and power and the restrictive practices of the London Stock Exchange, towards a new more competitive financial sector. But this research demonstrates that for the small investor, deregulation meant a contraction, rather than an expansion of choice.

During this period, large financial conglomerates such as banks, pension funds and unit trust companies capitalised on the deregulated environment to capture private investor markets and shape them to their needs. They created services that channelled individual savings through institutional investment instruments, rather than providing a means for individuals to engage in mass democratic ownership.

Conservative rhetoric promised a share-owning democracy and popular capitalism, yet individual investors’ share of equities declined, despite the fact that there was now over double the amount of them – from 28.2% in 1981 to 21.3% in 1989.

This research takes tensions between the London Stock Exchange and the licensed dealers of Britain’s over-the-counter market (OTC) between 1972 and 1987 to demonstrate the impact of institutional competition on the small investor in the context of deregulation.

There was a visible clash of values between the two, particularly over the good name of the City. The London Stock Exchange represented the old City ‘establishment’, while the OTC licensed dealers worked on the fringes of the UK securities market.

On the surface, deregulation appeared to be promoting a cultural shift away from the bowler hats and wood-panelled offices of the traditional City elites, towards a new generation of City workers characterised by the red braces and pinstripes of the yuppie. This was Thatcher’s new meritocracy in the City, a new class of youthful and hard-working entrepreneurs who were reinvigorating the financial sector.

As a result, it seemed that the 1980s was, as promised, a decade of dramatic and visible change in the City, and that investment had been taken out of the ivory towers and brought to the ordinary man and woman on the street.

But these were largely superficial changes. Traditional financial elites maintained and even expanded their position in private investor markets in this period. By tracking the rise and fall of the OTC, which first appeared in 1972 and had all but fallen by the wayside by 1987, this research outlines the hard fought battle for the private investor which lay behind public battles over the reputation and image of investment and the City.

This was a more pragmatic conflict over the ability of different institutions to service new and existing markets, at a time when the future of the UK securities market was far from clear. Indeed, it becomes apparent that large institutions such as the London Stock Exchange were able to use the 1986 deregulation of the Stock Market to oust competition from licensed dealers for private investor markets.

As a result, the small investor became increasingly restricted by the range of products on offer by a small but dominant group of financial conglomerates. This highlights the limitations of the Conservative government’s control over the political changes they enacted, as the economic self-interest of different institutions superseded the ideological designs of ‘popular capitalism’.

ENDS

Share-shopping over the counter: Thatcherism and the battle for the private investor, c. 1972-1988

Amy Edwards

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