The Financial Conduct Authority is asking for comments on its recent proposals to extend access to the non-equity securities market, a move that has been heralded as a return of retail investors to the bond market. Here, James Kelly, senior vice president of treasury, risk management and insurance at Pearson, the FTSE 100 learning company, sets out what it could mean for corporate treasurers.
“It is more nuanced than simply ‘the return of the retail market’. The disclosure requirements around [marketing to individual investors] were understandably very high. So over time, there has been a gradual increase in the minimum nominal purchase of bonds so that the minimum is now usually £100,000. This obviously would count out many investors, creating a big gap between small investors and those that can afford to risk such amounts.
“There is inevitably a tension between the big, repeat [institutional] investors and the desire to have greater diversification in the investor base so that a corporate is not beholden to a small group or limited number of players.
“But I think it is important to look at this from a UK economy point of view. The reality is that the stock market is one way of providing funding, but there is such a level of maturity, and the rules of engagement are such that it is not a flexible tool for a company. If you are a large listed company, it is a big thing to say that it wants to tap the equity market, and the numbers end up being big as well. This is why a lot of incremental capital raising is in the debt market.
“Having lower denominated bonds would certainly help in the secondary market, where there can often be little liquidity. If there is an active individual or small institutional market, this would create more liquidity.
“Bonds can be issued for specific purposes. We have seen the rise of ESG-related financing, but the ‘S’, social, part is the least explored, so the more flexibility there is around the size and participation of a bond issue, the greater the opportunities to respond to individual social issues – a £5m bond for a particular project with a clearly defined E, S or G piece becomes more achievable.
I would expect that there would be decent demand, as individuals, particularly those with retirement investments, are looking to add bonds to their portfolio, and in the long term, I would love to see a UK private placement market develop in the same way as in the US market
“Philosophically, if someone is happy to buy your shares, they should be happy to buy your bonds, so it creates greater investor buy-in. I would expect that there would be decent demand, as individuals, particularly those with retirement investments, are looking to add bonds to their portfolio, and in the long term, I would love to see a UK private placement market develop in the same way as in the US market. This might also help London adapt to a post-Brexit position of increasing participation.
“Of course, you won’t know how many people will come through if you open the door, but at least we can help open that door.”
The deadline for responses to the FCA’s engagement letters is 29 September 2023. Comments can be sent direct to the FCA at POATR@fca.org.uk. The ACT will also be responding to the FCA’s proposals. The Policy and Technical team can be contacted at technical@treasurers.org.
James Kelly was speaking to Philip Smith, editor of The Treasurer