I was watching the British series Sherlock Holmes and I noticed a couple of times they referred to bankers Sherlock was investigating or talking to as city boys. How common is this usage? Would the average person from the UK understand it? Or perhaps it's only specific to London? Does it only apply to bankers?
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In that case, you would probably write it with capital C, as City boys. The City in question is the financial district in the centre of London, the financial heart of Europe. The generic term “city boy” can be used more liberally (see Thursagen’s answer), but in this context, it means London traders and other financial highfliers.
To answer your questions in order:
"The City" refers to the City of London, the one-square-mile financial district within Metropolitan London, the equivalent of "Wall Street" in Manhattan. Calling a banker a "city boy" is a mild witticism, and an (afaik) original one.