COMMENT:Meeting the OFT challenge

In the City, as in life, there are two ways to go out - with a bang or with a whimper. Barings, as we know, went out with a bang when it collapsed in spectacular fashion and was taken over by the Dutch bank ING. Other famous City names could soon follow suit, albeit with less drama and fanfare.

Nine years after the City's Big Bang, a second wave of mergers and takeovers now looks increasingly on the cards. The culprit this time, as it was in 1986, is the Office of Fair Trading and its outgoing director-general Sir Bryan Carsberg. While it may not have been the Office of Fair Trading's main intention to reshape the City when it issued a raft of proposals to reform market practices, that may well be the outcome.

If the OFT's proposed changes to underwriting and market makers' privileges are implemented, even in part, they will add significantly to the already considerable pressures for concentration in the securities business. Should the generous fees for issue underwriting be cut, as the OFT insists must happen, then another nice little earner for the merchant banks is going to be squeezed. The prospect explains their distinct lack of enthusiasm for any tampering with such time-honoured customs. The same goes for the call to remove certain privileges for market makers, notably the ability to hide big trades.

The OFT argues, quite justifiably, that these privileges are bringing market makers unfair profits, distorting the market. British investment houses are fighting tooth and nail to protect their profits and privileges. But it looks a losing cause.

The OFT challenges come close on the heels of the Barings crisis. One lesson of that affair is that independent merchant banks are having to take on more risk to earn a living in a world where you need capital as well as brains and connections to survive. The lesson has not been lost on the remaining independent British investment banks.

Already the risk premium they must pay to attract funds has risen; so they are all paying more for their money. That hurts profits. The reform threats by the OFT add to an already heavy competition burden. All investment houses are feeling the pain of the excessive cost build-up in the past few years' bull markets. They earn next to nothing in this year's financial doldrums.

The writing is on the wall for another wave of restructuring in London, and houses like Cazenoves, Smith New Court, Schroders, Flemings, Rothschilds and Hambros, to name but the obvious few, are unlikely to emerge unchanged. The most enthusiastic predators are mostly continentals, such as ABN Amro, Swiss Bank Corporation and Paribas. The City is realising its ambition of becoming Europe's financial centre, but not quite in the way it intended.