City watchdog plots shakeup of rules to open UK bond markets to private investors by scrapping ‘arbitrary’ disclosure rules
- The FCA has launched a consultation on democratizing bond markets
- The regulator wants to end the various disclosure requirements
- It also plans to make a clearer distinction between non-equity securities
The financial regulator has taken an important step towards opening up bond markets to UK retail investors.
The Financial Conduct Authority (FCA) advises on removing barriers to participation in fixed income, which could allow the regulator to end the onerous disclosure requirements that effectively keep everyday investors out of the market.
In the UK, the average investor can buy all kinds of stocks but is largely excluded from direct investment in bond markets and typically invests in a bond fund to build fixed income positions instead.
The FCA is trying to give everyday investors better access to the bond markets
About 89 percent of the securities on the regulator’s official list are non-equity securities.
Since the 2008 global financial crisis, there have been stricter regulatory requirements for bond issuers, including an increase in disclosure rules for products with a face value of less than €100,000.
For non-equity issuing companies, meeting increased disclosure standards has become a more onerous task, so they typically choose to borrow from major financial institutions.
This is because it requires a summary, details of the issuer’s history and inclusion of cash flow statements and other financial information.
It is therefore often easier to completely avoid targeting retail investors who cannot reach the €100.00 threshold.
The FCA said this has led to a ‘split between wholesale and retail markets’ and while the €100,000 threshold was intended as an investor protection measure, it was ‘arbitrary’.
‘We therefore propose to establish one standard for bond disclosure in the prospectus regime, based on the existing wholesale disclosure annexes.’
The FCA also said it was considering whether the regime should make a clearer distinction between types of non-equity securities to “reduce the risk of harm to investors.”
Investors should always be careful when buying corporate debt through bonds because the money you make back depends on the company not going out of business.
> Read our guide to investing in mini, retail and corporate bonds
The mini-bond market came under scrutiny following the collapse of London Capital and Finance, which left thousands of depositors with huge losses.
Elsewhere, British investors in a £50m bond from Indian Bollywood group Eros Media World faced a similar predicament after the group failed to pay interest in October 2022.
In March it offered investors 60p per £1 on half of the bonds, rolling the remaining bonds into a new transaction that will not be repaid until 2026.
Stacey Parsons, head of fixed income at Winterflood Securities and chair of the Investor Access to Regulated Bonds Working Group, said the FCA’s new proposals were a “beam of light.”
“Regulation may prove to be the easy part in all of this, process changes will also be required by stakeholders in the debt capital markets ecosystem to achieve better access for all investors.”
However, capital markets can adapt and we welcome the FCA providing a legitimate path of change. What is needed now is that the debt capital markets function with everyone in mind – both wholesale and retail, where possible.’
The consultation period runs until September 2023.