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Ask anyone about powerful stock markets and financial hubs, and the conversation will likely turn to Wall Street. But in actual fact, London has been far more powerful than Wall Street – or any other financial hotspot – for many years. Up until the recent Brexit referendum, which saw Britain vote to leave the European Union, London was king when it came to business, stock trading and financial operations in general.
How did London surpass Wall Street as the world’s finance capital? Partly it was due to favourable legislation, and partly to good positioning. London’s time zone means that its business hours overlap those of the Middle East, America and Asia – something which definitely put the city in good stead when it came to trading.
That said, the key event in London’s rise as the world’s premier financial hub was probably legislation passed the “Big Bang” reforms passed by Margaret Thatcher’s government in 1986. These were intended to remove the laws that were protecting Britain’s slow-growing firms and contributing to sluggish financial markets.
The results were immediate. From a network of small companies with very little potential for growth, London-based businesses grew overnight to become conglomerates of huge proportions, along with more advanced financial practices like virtual banking.
Even better news for UK businesses lay ahead. The Big Bang had created relaxed regulatory measures that allowed corporations to earn unlimited amounts of money between the 1980s and the early 2000s. Helping London further, in 2002, the US Congress tightened corporate regulations through the Sarbanes-Oxley reforms, which increased paperwork and put a cap on the local earning opportunities.
So London’s stock markets flourished: American firms were forced to adhere to the Sarbanes-Oxley reforms, but other international markets simply sidestepped them by taking their business to London instead. It was through these actions that London finally bypassed Wall Street, becoming the world’s number one hotspot for trading and business ventures. Within a few years London had captured more than 75 per cent of the US exchange’s public stock, and Congress was trying to win them back through softer regulation.
The Brexit shockwave
London enjoyed its status as the world’s hub of finance for a few more years, but it was not to last. When the public voted for Brexit, London’s Stock Exchange plummeted, as companies and investors pulled out of Britain and moved their business to other European districts.
Brexit has had a huge impact on businesses in the UK, and a number of European cities that have the potential to replace London as the finance capital of Europe – and perhaps even the world – have stepped forward. Frankfurt, Paris, Madrid and Amsterdam are being touted as candidates, while many experts also theorise that Dublin’s technologically advanced approach may put them in the lead.
However, the glory days might not be over just yet for London. Some commentators have suggested that the British capital will continue to dominate European financial markets for a number of key reasons.
Firstly, the strength of the local courts means that the rule of law will continue to be upheld, including those that protect creditor and shareholders’ rights. Secondly, the UK’s university education offerings in economics and finance are far superior to those anywhere else in Europe. And lastly, the UK’s regulations controlling tax and employment is designed specifically to boost the financial industry’s overall health and profit margins.
There is no denying that trade has become more challenging in London since Brexit. Tax loopholes have been closed, and companies are expected to shell out more of their profits in the process. However, if London manages to keep its dominance over European financial markets, it stands to reason that the city may one day reclaim its title of the world’s greatest finance hub.