Behind the City drive to open up Britain’s bond markets

A shake-up of the City rules could soon open the UK corporate bond market to a wider pool of UK investors, giving them a chance to earn solid income by covering the debts of FTSE 100 giants.

Proposals published by the Financial Conduct Authority will effectively reverse disclosure requirements introduced in the aftermath of the 2008 financial crisis, which inadvertently resulted in blocking direct access to most corporate bonds for all but financial institutions and the very rich.

At the moment, any bond issue priced above £100,000 is considered ‘retail’ and is therefore subject to significantly more disclosure requirements – meaning targeting individual investors simply isn’t worth the time of some major issuers.

The city’s lobbying effort to change this has been joined by a host of different companies, with Hargreaves Lansdowne, Brewin Dolphin and London Stock Exchange Group in the Investor Access to Regulated Bonds Working Group, which has been in talks with the regulator, HM Treasury and MPs.

The efforts have received much less fanfare than the government promises to revive declining interest in Britain’s much-maligned stock market, but offer an opportunity to open new avenues for companies to raise money, while access from ordinary investors to relatively low-risk fixed-income investments.

Stacey Parsons, head of fixed income trading at Winterflood Securities, the UK’s largest market maker, told This is Money: “There has been a shift in narrative over the last 10 years as well-intentioned regulations put in place to encourage investors protection has changed. had almost the opposite effect.’

The FCA said the current rules have had a “dividing” effect by splitting access to the bond market, but there is also evidence of a more damaging impact.

When the regulator banned the marketing of mini-bonds in 2020, the regulator cited market concerns that “the failure of the listed market to meet retail demand for bonds” had triggered the move into “the speculative assets,” which “miss verifications and provide poor documentation.” ‘.

This allowed some investors seeking income to take losses as a result of the 25 mini-bond issuers reportedly collapsing between 2018 and 2021.

Why has the push for wider access to corporate bonds come now?

A few years ago, the lack of access was probably less of a concern when bonds were largely out of fashion for many investors as yields remained low and stock markets continued to climb higher.

Now, however, there is a much greater need for inflation-reducing income as yields have risen significantly and investors are looking for stability amid volatile markets.

Parsons said, “It’s about asset class choice, income and portfolio diversity, and retail investors’ willingness to seek returns across a number of asset classes.

“If a publicly traded issuer has a stock listing, then it should have the ability, or at least the ability, to deliver a bond. We don’t call them retail stocks, so why call them retail bonds?

“There are a lot of talks right now about equity access, for example IPO access.

‘Individuals are much more concerned with their portfolios than they used to be.

“A number of stakeholders wanted to see if there was an opportunity to provide something that was consistent with investor protection, but ensures that investors have a choice of asset class.”

What does the corporate bond market currently look like for retail investors?

If confirmed, the FCA’s proposals could help bring UK investors’ share of the bond market closer to international counterparts such as the US and Italy, where direct family ownership of bonds is more common.

Data from the European Central Bank shows that individual retail investors held £100m of debt securities in the UK at the end of 2020, while in Italy and the US it was £4.7bn and £13.9bn respectively.

There is also evidence of growing retail involvement in the US corporate bond sector.

The plan could give investors more flexibility to bypass bond funds, which currently have the most access to the market, avoiding management fees.

In addition, investors could be more focused with their exposure, rather than investing in a broad portfolio of dozens of bonds, as is standard practice within a mutual fund.

They should make sure they are well diversified here, rather than relying on a fund manager to do that. But most bond funds trade in and out of bonds rather than holding them to maturity, which some individual investors may want to do.

There were 1,423 corporate bonds listed in the UK in 2022, recovering from a Covid-19 dip and reaching roughly the same level as in 2018.

However, the amount raised through these issues fell sharply from £199.1bn in 2021 to around £157.1bn last year. In 2018, £234.2 billion was raised.

Shrey Kohli, head of debt capital markets and product development at the London Stock Exchange, welcomed the FCA’s proposals, saying the group “supports a regime whereby debt capital markets can work more effectively for companies and improve access for all types of investors.”

He added: “This is an important step in ensuring that UK capital markets can continue to serve their purpose, offer companies the choice to diversify their sources of funding, and be a democratizing force for investors by channeling savings into growth .’

What about the Orb market

The London Stock Exchange launched the Orb (Orderbook for Retail Bonds) market in an effort to open up direct bond investing to the UK’s small investors.

A string of high-profile launches included a Tesco Bank retail bond in 2012, paying an annual interest rate of 5 percent until 2020, which was so popular it had to close its doors early.

Meanwhile, a market-traded Lloyds Bank bond pays 6.5 percent through 2040. But after the initial fanfare, the Orb market saw new issues slowly trickle down.

Falling interest rates, an abundance of cheap money from the central bank and investors’ money for companies looking to raise money, and controversies over unregulated mini-bonds have all put a dent in the Orb market in the eyes of investors.

Retail size bonds – or bonds priced between £100 and £1,000 – currently listed on Orb are mainly issued by financial services companies such as banks and building societies.

There are some other options outside of financials, such as a Tesco bond priced around £204 paying a 3.3 per cent coupon or a Fuller’s bond priced £115 paying 6.9 per cent.

Chief of Research at JM Finn Sir John Royden said part of the problem facing Orb is “very wide” bid/ask spreads – the difference between the buyer’s price and the seller’s price – weak market depth and the lack of available credit for some instruments .

However, he added that “direct access to the retail investor pool” offers a number of benefits to issuing companies.

‘[Firstly]a new pool of liquidity, [which is] important when the wholesale market dries up in times of crisis. [It also] publishes equity for issuers that have publicly traded stocks [and] some companies may issue bonds as a precursor to stock listing.”