The writer is chair of the Investor Access to Regulated Bonds industry group and head of fixed-income strategy and sales at Winterflood Securities
In the UK, the average retail investor can buy equities of all kinds — a triple leveraged exchange traded fund or even a crypto asset — but not a Church of England bond launched this year.
Access to the corporate bond market for both investors and discretionary wealth managers has been steadily eroded in the UK over the past 10 years, partly as an unintended consequence of the adoption of various EU regulations. At a time when retail investors are seeking safer ways to obtain yield and income, this needs to change.
Over the past decade, the EU has increased regulatory requirements for bond issuance. In particular, there was an increase in disclosure requirements for bonds with a denomination of less than €100,000. As a result, most issuers find it easier to avoid investors that cannot meet the threshold. The denomination of the Church of England bond issue was £100,000.
Corporate bond issues are now firmly in the hands of wholesale markets. Data compiled by the International Capital Market Association show that in 2000, 90 per cent of bonds issued across Europe had minimum investments of €1,000. By 2018, 90 per cent of all bond issuances had a minimum of €100,000 investment.
The UK has signalled its intent to address this following Brexit. The Treasury’s paper on the outcome of its UK Prospectus Regime Review this year recognised the “artificial incentive” to issue high-denomination securities. It said the government does not intend to include denomination as a factor which would permit differing disclosure for non-equity securities.
The Financial Conduct Authority has also confirmed it wants UK divergence from EU rules for what is classified as packaged retail and insurance-based investment products, with an intention to promote liquidity and choice in the retail market for corporate bonds.
The UK has long had a love affair with direct investing and ownership of equities — from personal equity plans to the 23-year-old “stocks and shares” ISA. But outside of the parameters of National Savings & Investments, the UK has rarely focused on offering regulated income as a product. By contrast, income forms a larger part of US investors’ portfolios, such as issuance from the $4tn largely tax-free municipal bond market.
UK individuals should have greater access to bonds from companies with a premium stock market listing, such as those in the FTSE 100 or organisations that have a similar level of oversight. We need issuers to consider the adoption of smaller-denominated corporate bonds, unlocking productive capital in line with the ambitions of both the government and the FCA.
It is also incumbent on the financial services industry to support sound investments and ensure the availability of appropriate financial products. This has elevated importance given the FCA’s objective of shifting hoarded savings into investable assets, as announced last year.
Global financial markets are rightly focused on engaging the next generation of investors, but recent census data show that baby boomers are the largest demographic in the UK, with over-65s representing 18.6 per cent of the population. Equally, the group with the highest level of average savings are those aged 60 to 64 — they enjoy an average net financial wealth of £116,900 against an average net financial wealth of £28,400 for those aged 35 to 39.
The deployment of surplus cash among this older group is leading some savers into unregulated territory, such as cryptocurrencies and other unsuitable products, in their quest for income.
Indeed, some British investors suffered through the 2020 Blackmore Bond fiasco, which came hot on the heels of the London Capital Finance mini-bond scandal in 2019. Both investment schemes lured unsuspecting consumers and lost them millions of pounds, when they were simply seeking higher income than with traditional savings accounts.
These scandals have highlighted the importance of the FCA’s commitment to a new consumer duty, a package of measures designed to improve communications and ensure products and services meet the needs of the consumer.
It is time to engage investors further by ensuring secure and transparent access to regulated premium-grade listed bonds. This would support diversified streams of funding for premium-grade issuers, and it would help to unlock the savings gap in the UK, as consumers’ portfolios evolve from aspirations of growth to income.