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

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

Proposals published by the Financial Conduct Authority will effectively roll back disclosure requirements put in place in the wake of the 2008 financial crisis, which inadvertently resulted in blocking off direct access to most corporate bonds from anyone but financial institutions and the very wealthy.

At present any bond issuance priced at more than £100,000 is considered ‘retail’ and is therefore subject to substantially more disclosure requirements – meaning targeting individual investors is just not worth the time of some big issuers.

City lobbying efforts to change this have been joined by plethora of different businesses, with Hargreaves Lansdowne, Brewin Dolphin and London Stock Exchange Group among 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 Government promises to revitalise flagging interest in Britain’s much maligned stock market, but have the opportunity to open up new routes for companies to raise cash while transforming everyday investors’ access to relatively low risk fixed income investments.

Stacey Parsons, head of fixed income trading at the UK’s largest market maker Winterflood Securities, told This is Money: ‘There’s been a change in the narrative over the last 10 years or so because well-intentioned regulation that was brought in to protect investors has almost had the opposite effect.’

The FCA said current rules had had a ‘bifurcation’ effect in splitting access to the bond market, but there has also been evidence of a more damaging impact.

When banning the marketing of mini-bonds in 2020, the regulator cited market concerns that ‘the failure of the listed market to address retail demand for bonds’ had ‘caused the move to’ the speculative assets, which ‘lack verifications and provide poor documentation’.

This potentially left some income-seeking investors nursing losses as a result of the 25 mini-bond issuers that reportedly collapsed between 2018 and 2021.

Why has the push for wider corporate bond access come now?

Lack of access was likely less of a concern only a few years ago when bonds were largely out of fashion among many investors as yields remained depressed and stock markets continued to climb higher.

Now, however, there is much greater appetite for inflation busting income as yields have picked up significantly and investors look for stability amid volatile markets.

Parsons said: ‘It’s about asset class choice, diversity of income and portfolios, and a willingness for private investors to seek out returns across a number of asset classes

‘If a listed issuer has an equity listing, then they should have the ability, or at least the opportunity to deliver a bond. We don’t call them retail equities, so why should we call them retail bonds?

‘There’s a lot of conversations at the moment around access to equity, IPO access, for example.

‘Individuals are much more engaged in their portfolios than they once were.

‘A number of stakeholders wanted to see whether there was an opportunity to deliver something that was in line with investor protection but ensures investors have asset class choice.’

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

Should the FCA’s proposals be confirmed, it could help bring UK investors’ share of the bond market closer in line with international peers like the US and Italy where direct household ownership of bonds is more common.

European Central Bank data shows that as of late 2020 individual retail investors held £100million in debt securities in the UK, while in Italy and the US the figure is £4.7billion and £13.9billion, respectively.

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

The plan could hand investors greater flexibility to bypass bond funds, which are how most currently access the market, thereby avoiding management fees.

Additionally, investors could be more targeted with their exposure, rather than investing in a broad portfolio made up of dozens of bonds as is standard within a investment fund.

They would need to ensure they were properly diversified here, themselves, rather than relying on a fund manager to do it. 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, bouncing back from a Covid-19 dip to reach broadly the same level as in 2018.

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

Head of debt capital markets and product origination at the London Stock Exchange Shrey Kohli welcomed the FCA’s proposals and said the group supports ‘a regime where debt capital markets can work more effectively for companies and improve access for all types of investors’.

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

What about the Orb market

The London Stock Exchange launched the Orb market (Order book for Retail Bonds) in an attempt to open up direct bond investing for Britain’s small investors.

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

Meanwhile, a Lloyds Bank bond trading on the market pays 6.5 per cent until 2040. But after the initial fanfare, the Orb market saw new issues slow to a trickle.

Falling interest rates, an abundance of cheap central bank money and investor cash for companies looking to raise funds, and controversy over unregulated mini-bonds all dented the Orb market in investors’ eyes.

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

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

Head of research at JM Finn Sir John Royden said part of the issue facing Orb is ‘very large’ bid/offer spreads – the difference between the buyer’s price and the seller’s price – weak market depth and the lack of credit rating available for some instruments.

However, he added, ‘direct access to the pool of retail investors’ offers a number of benefits to issuing companies.

‘[Firstly], a new pool of liquidity, [which is] important if the wholesale market dries up in times of crisis. [It also] publicises equity for issuers who have listed equity [and] some companies may be issuing bonds as a pre-cursor to listing equity.’