Market participants have welcomed the results of a consultation process launched in early 2023. In December 2023, the Financial Conduct Authority (FCA) released a summary of feedback to the consultation that included proposals to widen access to the non-equity securities market.
James Leather, director of consultancy Corium Treasury, says the almost universal support for the FCA’s plan to remove the dual disclosure standard for wholesale and retail bonds, combined with issuances set at lower denominations, could be a gamechanger.
Leather says the FCA’s proposed incentivisation scheme, encouraging issuance by UK corporates of bonds aimed at a wide range of investors, will give retail investors greater access to regulated bonds since the implementation of the EU Prospectus Directive in 2005.
By reducing the level of disclosure required for issuers, set under EU rules, they will be able to issue smaller denominations of bonds, which is currently limited to a minimum of £100,000. This approach will open the retail side of the bond market to smaller investors, he says.
Leather believes the move could reinvigorate the sterling issuance market, which he says has suffered from a sharp reduction in retail investment in blue chip bonds over the past two decades. “If you go back prior to 2005, 67% of bonds of at least investment grade were of a denomination below £2,000, which meant that they were accessible to retail investors.
“The most recent stat on that is that it is less than 3%, so you can see it has taken out the ability of investors to directly invest in an investment grade bond. That’s despite the fact that retail funds under management assets have grown to around £2.7 trillion,” he adds.
What they want is £100 or £1,000 denominations – like they used to be – so that their clients can diversify
Michael Smith, CFA, debt capital markets, at broker Winterflood Securities, says wealth managers and execution-only platforms are frustrated at being locked out from investing for clients in bonds of investment-grade companies.
“The problem is that your typical investor can’t access the primary or the secondary bond markets at all and in any event, who’s got £100,000 to buy one bond? Whilst wealth managers can access bonds, many don’t because the £100,000 per bond denomination doesn’t make sense. What they want is £100 or £1,000 denominations – like they used to be – so that their clients can diversify,” he says.
Smith says that at a stroke, lowering denominations will give an issuer access to the retail intermediaries market, which will increase competition in the space.
“Conservatively, our assessment is that wealth managers alone can speak for around £200m in a single bond issuance. If you look at the most successful ORB (London Stock Exchange’s retail order book) retail-only bonds from blue chips around 10 years ago, the range was between £200-£300m. We’ve not included the demand from the execution-only platforms and their impact on secondary pricing,” he adds.
Following the 18 December deadline for responses, after a series of engagement letters that form part of the government’s post-Brexit ‘Edinburgh reforms’, the FCA says it wants issuers to continue providing views on areas of improvement as part of the new regime.
See also:
Opening up bond market will give corporates more flexibility
Return of retail to bond markets on the cards
Lawrie Holmes is a freelance business and financial journalist