The instinct that favours competitive solutions to problems of industrial structure is almost always sound. But the evolution of competitive markets is a process of experiment and discovery whose outcome is unpredictable.
This week, the City of London celebrates the twentieth anniversary of ‘Big Bang’ – the deregulation of markets in 1986 which ended fixed commissions and removed restrictions which required firms to be narrowly specialised and make new entry, especially by foreign businesses, substantially harder.
‘Big Bang’ was the result of legislation passed a decade earlier whose significance few people in the City then appreciated. The scope of the Restrictive Trade Practices Act was extended to services. That law did not ban agreements to restrict competition. It required those who made such agreements to place them on a public register. The register included a wide range of harmless practices, such as the official steps of the main Scottish country dances.
But the Office of Fair Trading could refer more serious restrictions to a specialist tribunal, the Restrictive Practices Court. Unless the businesses concerned could persuade the Court that what they were doing was in the public interest, the Court would require that the agreement be abandoned. In the last days of Labour government in 1979 the OFT decided to ask the Court to look at the rule book of the Stock Exchange.
In common with many industries faced with competition investigations, the City took the view for some time that the law could not be aimed at them, and that everything they did was for the public good. Only in 1983, with the case about to be heard in Court, did the leadership of the Stock Exchange come to terms with the reality that they would probably lose. With very few exceptions – books, medicines, and an extraordinary decision in which the judges maintained that an agreement fix the price of bolts and nuts benefited consumers because it saved them the anguish of shopping around – the Court had never found price fixing agreements in the public interest.
And so the chairman of the Exchange, Sir Nicholas Goodison, cut a deal to maintain the City’s tradition of self regulation. In return for ad hoc legislation which gave legal exemption from scrutiny to the Stock Exchange rule book, he promised that the restrictions on competition it contained would be removed.
The Director General of Fair Trading, Sir Gordon Borrie, was furious: not only was he deprived of a day in Court after four years of preparation, but he was deprived of it as a result of a private political deal from which he had been pointedly excluded. But, as he later acknowledged, he was wrong. The outcome was more successful than anyone had anticipated – strongly reinforcing London’s position as a world financial sector – and also substantially different from the future that had been anticipated.
Investors gained from lower commissions as the price fixing cartel ended. But the greatest beneficiaries were the partners of the member firms of Goodison’s Stock Exchange. Brokers and jobbers were acquired at ever more absurd prices by large banks. Almost all of these deals failed. The partners retired to expensive yachts and exclusive villas: the marzipan layer of employees below resented the alien culture of their new masters. A decade later, the dominant players would be new entrants: mostly American investment banks, whose professionalism supplanted the gentlemanly culture in which the future of the City would be determined in private conversation between a cabinet minister and the Stock Exchange Chairman.
And so the deal whose purpose was to keep regulators out of the Square Mile would give them a larger role than ever before. Big Bang led to the creation of what would become the Financial Services Authority and its power and influence grew steadily. The world in which the disapproving eyebrows of the Governor of the Bank of England provided the ultimate sanction in a regime of self-regulation would give way to rulebooks, compliance officers, and fines.
The instinct for competitive solutions to problems of industrial structure is almost always sound. But the evolution of competitive markets is a process of experiment and discovery whose outcome is unpredictable. If business leaders could successfully predict the outcome of competitive markets, there would be no need for them.
