On 27 October 1986, the rules that had governed British financial markets since the aftermath of the Great Depression were swept away in a single day. The event became known as the "Big Bang" — an appropriately explosive name for a deregulatory act whose consequences would eventually detonate the global economy.
What the Big Bang actually did
Before 27 October 1986, the London Stock Exchange operated under a set of rules that had been deliberately designed after the financial chaos of the 1920s and 1930s to prevent systemic risk:
- Fixed commissions: Brokers could not undercut each other on price, preventing the race-to-the-bottom on risk that competitive pressure creates
- Single capacity: Firms had to choose to be either a broker (acting for clients) or a market-maker (trading for themselves) — not both. This prevented the obvious conflict of interest
- Ownership restrictions: Outside ownership of Exchange member firms was limited, keeping banks from absorbing brokers and creating vertically integrated financial conglomerates
The Big Bang abolished all of this simultaneously. Commissions were freed. The broker/market-maker distinction was eliminated. Outside ownership caps were lifted overnight. American and Japanese banks moved in immediately, absorbing the old partnership firms and creating enormous integrated financial institutions.
Why it was done
The official justification was competitiveness. New York had deregulated its financial markets in 1975, and London was falling behind as business migrated to Wall Street. The City needed to modernise or atrophy.
This was partly true. But there was also a deeper ideological motivation. The Thatcher government believed, as a matter of conviction, that regulation impeded efficiency, that markets allocated capital better than rules, and that the financial services industry, if unleashed, would generate wealth that would spread through the economy.
The concept of systemic risk — the idea that the interconnection of financial institutions could cause a failure in one to cascade through the entire system — was not seriously engaged with.
What the deregulation created
The Big Bang created the conditions for the invention and proliferation of increasingly complex financial instruments. With the separation between brokers and market-makers gone, firms could now trade for their own account while simultaneously advising clients. With the ownership restrictions lifted, huge amounts of capital could be concentrated in single institutions.
The result was a financial sector that:
- Grew to represent roughly 10% of UK GDP by the mid-2000s (up from around 5% pre-deregulation)
- Invented mortgage-backed securities, collateralised debt obligations, and credit default swaps of staggering complexity
- Paid bonuses that rewarded short-term risk-taking with no accountability for long-term consequences
- Operated under a regulator (the FSA, created in 1997) that explicitly pursued "light-touch" oversight
The 2008 reckoning
When the US subprime mortgage market collapsed in 2007–08, the complex financial products built on top of those mortgages — many of them designed, packaged, and sold through the London market — proved worthless. The interconnection that the Big Bang had enabled meant that failure spread rapidly.
In the UK:
- Northern Rock required an emergency Bank of England bailout in 2007 — the first run on a British bank since 1866
- Royal Bank of Scotland was nationalised at a cost of £45.5 billion — the largest bank bailout in global history at the time
- Lloyds TSB was merged with Halifax Bank of Scotland (HBOS) and required £20 billion in state support
- Total bank support from the UK government peaked at approximately £500 billion — loans, guarantees, and capital injections combined
The Bank of England subsequently described the financial crisis as "the largest in history."
The austerity that followed
The political consequence of the bank bailouts was a decade of austerity. The Conservative-Liberal Democrat government elected in 2010 used the public debt created by the financial crisis as justification for cutting £30 billion from public services. The NHS, local councils, welfare provision, legal aid, and housing benefit were all systematically reduced.
Research published in the British Medical Journal attributed an estimated 120,000 excess deaths to the austerity period. This is not the direct death toll of the financial crisis — it is the death toll of the political response to it. But the crisis, and the response, were both made possible by the 1986 decision to remove the safeguards that had contained financial risk.
The closed loop
The intellectual integrity of the argument requires acknowledging a chain of causation:
- Big Bang (1986) removes safeguards and creates vertically integrated financial institutions
- The financial sector expands and invents increasingly complex instruments
- Regulatory framework, operating under explicit light-touch principles, fails to contain the risk
- The 2008 crash produces losses that require £500 billion in public money to contain
- The government uses the resulting public debt to justify a decade of spending cuts
- Research attributes tens of thousands of excess deaths to those spending cuts
This is not a conspiracy. It is a policy chain — one whose beginning was a deliberate decision, made by a government that had been warned of the risks and chose ideology over prudence.
Sources
- Bank of England — The Big Bang: 30 years on (2016)
- NAO — Maintaining financial stability across the United Kingdom's banking system (2009)
- BMJ — Effects of health and social care spending constraints on mortality in England (2019)
- Vince Cable — The Storm: The World Economic Crisis and What It Means (Atlantic Books, 2009)