Prawn Cocktails and Cold Shoulders

Over the last few decades, the financial sector has become an integral part of the British economy. However, recently its political fortunes have become increasingly uncertain. Central to this uncertainty is the fallout from the 2008 financial crash, which dealt the City significant reputational damage, contributing to the ostracism it experienced during public debates over Brexit. Both seismic events led to bouts of disruptive re-regulation for the sector despite prevailing opposition from the City.

Yet surprisingly, it was Conservative-led governments that have presided over these reforms, while Labour has adopted a more conciliatory approach. Why has the traditional party of free enterprise shown greater hostility towards finance than its social democratic rival?

The answer lies in each party’s approach to winning elections and, when in power, governing competently (what the late political scientist Jim Bulpitt called ‘statecraft’). Far from always aligning with the City’s preferences, the Conservative Party has jettisoned the sector at crucial junctures when its views conflict with the party’s capacity to govern. Conversely, the Labour Party has, during recent decades, viewed earning the City’s confidence as a key plank of its own statecraft.

What are the sources of the City’s power and influence in British politics and how have these dynamics played out in recent decades?

The puzzle of the City’s power

Business power is classically manifest in two forms: structural power, the extent policy makers are beholden to markets to maintain office and govern effectively; and instrumental power, the alignment of economic and policy elites through political connections.

In the UK, the City has high levels of structural power and can constrain policy makers in their decisions through implicit or explicit threats to withhold or relocate investments. This strong position in Britain is due to a unique sectoral cocktail: centrality in funding the real economy; utility-like control of payments systems; highly mobile firms with low sunk costs; and an increasing importance as an employer-taxpayer in its own right.

Similarly, the City wields significant instrumental power. It provides sizeable political donations, faces comparatively weak countervailing lobby group opposition, and has in place significant networking and personnel exchange between its firms and lobby associations, financial regulators and Westminster policymaking.

On paper, these precepts of business power should align Conservative and City ambitions. Free-market Conservatives should celebrate the finance sector’s extensive structural power and caution the party against defying it. Moreover, alignment should be locked in by financial (£50m since 2010) and personnel flows from the City (with bankers becoming MPs, including many that were elevated to the Cabinet) that far outweigh any such linkages with Labour.

However, since the 1990s, Labour’s behaviour towards the City has largely been placatory, while the Conservatives have been guided by expediency to the point, at important junctures, of antagonism.

Labour’s prawn cocktail offensive

For Labour, the City’s structural power has acted as a constant constraint on its leaders since Neil Kinnock and John Smith dramatically reversed the party’s historical hostility to the sector in the early 1990s. New Labour then enthusiastically embraced the City as a motor for growth and fiscal returns. With a lack of historic instrumental ties, ministers practised a so-called ‘prawn cocktail offensive’ by systematically courting the City, visiting firms to allay concerns about a potential Labour government.

Since moving into opposition in 2010, all Labour leaderships have broadly continued this dialogue, including John McDonnell and current leader Sir Kier Starmer, rather than importing the more consistent anti-Wall Street positioning of the American left. At its core, this strategy is a matter of statecraft. Support from the City is understood as a boost to Labour’s electability and its capacity to govern the British economy effectively.

Conservatives jettisoning the City

For the Conservatives, the default party of business for over a century in British politics, instrumental ties to the City have been strong and enduring. The 1990s and 2000s bear witness to this relationship. However, far from making the party subservient, such ties have enabled it to defy majority City interests when its capacity to govern is threatened, the logic being that financial firms will not radically divest from the British economy and absorb any costs imposed by a Conservative government.

Since 2010 two key points of departure have shown the party’s willingness to break with the City to deliver its statecraft objectives: the 2008 financial crisis and Brexit.

In response to the financial crash the Conservatives prioritised removing the then leading regulator, the Financial Services Authority, and appeared ambivalent about the controversial Liberal Democrat proposal that the UK might unilaterally separate investment and retail banking in its largest banks. However, after the 2010 election, the Conservatives prioritised securing a coalition agreement with the Liberal Democrats. Despite City threats of relocating banks’ headquarters, the Conservatives pragmatically traded potentially separating commercial and investment banking (in the form of the Independent Commission on Banking) for the abolition of the regulator. Statecraft pragmatism triumphed, and the UK’s largest non-bailed out banks in particular, HSBC and Barclays, were forced to absorb significant adjustment costs.

Brexit tested this pragmatism to the extreme, with the Conservative Party defying majority City preferences in favour of ‘harder’ EU dissociation sought by a smaller coterie of primarily hedge funds and alternative investments. The City’s warnings that over 75,000 jobs could be relocated and £10 billion lost in tax receipts did not deter Theresa May’s early ruling out of continued single market access and the City’s main lobby associations found themselves isolated and unable to significantly sway post-referendum debates.

While firms have responded by significantly relocating some trading activity and steadily shifting jobs, Brexit appears not to have been a precipice for the City and has given the current Conservative government time to regroup. Chancellor Rishi Sunak’s talk of “freedom to do things differently” promises meaningful divergence from the EU after Brexit but has yet to be backed up by substantial policy movement signalling a future direction.

Concluding thoughts

In recent years, the Conservatives have strategically jettisoned the City when it suits them. For this, the party has borne low political costs. Lacking such linkages and historically sensitive to the City's structural power, Labour's approach has been consistently marked by iterations of courtship rather than antagonism.

Looking forward, while both parties desire positive relations with the City, it is the Conservatives who are likely to feel greater discretion to defy it the next time they are forced to choose between the City’s interests and their own party’s.