Following on from our mid-December summary of UK debt capital market reform and retail inclusion, we can report that the FCA released its latest consultation covering this subject on 31 January in the form of CP25/2.
The key proposals relating to retail inclusion in bonds reside in chapter 3 (Proposals for non-equity securities) and are as follows:
Chapter 3 also reminds readers that the FCA proposes (in CP24-30, published on 19 December last year) carrying across PRIIPs debt security scope clarifications to the new CCI regime, with an amendment making it clear that typical ‘make whole’ clauses do not cause corporate bonds to fall within scope of the CCI regime (previously PRIIPs).
CP25/2 covers not just non-equity securities and retail inclusion, but also: changes to the UK Listing and Prospectus Rules (including the removal of the further issuance listing application process); Listing Particulars; and consequential handbook changes and transitional provisions. The consultation should be viewed together with the FCA’s consultation published in July 2024, CP24/12.
Both consultations build on engagement papers released by the FCA in 2023. Together they form the proposed details of the Public Offers and Admissions to Trading Regulations (the framework made by parliament in January 2024) that will come into force later this year, replacing the UK’s Prospectus Regulation.
The proposals dovetail with recent reforms to the Listing Regime and impact both the UK’s debt and equity capital markets, aiming to reduce the cost of listing, to make capital raising easier and to remove barriers to retail participation.
The next steps are:
“Overall, we are positive on the proposals,” says Michael Smith, head of debt capital markets at Winterflood Securities. “The FCA should be commended for having gone as far as they have, to understand and address the wide range of factors that are preventing issuers from using low denomination bonds. There is still some work to be done, but it speaks volumes that the conversation has moved from whether retail inclusion will happen, to how it will happen. Qualifying bond issuers will soon have a material and viable source of additional capital, that also diversifies their investor base.”
James Leather MCT is director at Corium Treasury Limited
From the perspective of many corporate bond issuers, the current regulations (largely implemented since the turn of the millennium) have acted as a material disincentive to issuing lower denominated bonds and this has been reflected in the effective cessation of the retail bond market in the UK.
Looking across markets internationally where there are no such regulations, the application of a lower denomination to an issue is far more common practice, and feedback from large multinationals who issue both in the UK and globally is that, if the disincentives were removed from the UK market, they would be indifferent to issuing lower denomination bonds, something they already do in other jurisdictions.
For those less frequent issuers, or those who would choose to issue in the UK for commercial or strategic reasons, the ability to offer their bonds to a retail audience without the current barriers, and thus broaden their pool of providers of capital, is attractive.
However, there are challenges with the current proposals that will need addressing. For example:
• existing product governance rules (e.g. the circumstances under which production of a key investor information document (KIID) is a prerequisite) would need to be amended.
• the proposed definition of ‘non-complex listed corporate bonds’ may be too narrow, excluding many who currently issue under the existing regime. For example, many of the bonds on the London Stock Exchange (LSE) Main Market are not issued by entities with a UK equity listing (or guaranteed by such an entity) – and the proposed definition would also exclude those issued by a variety of otherwise potentially highly desirable issuers (e.g. housing associations, or partnership organisations such as John Lewis).
From the perspective of the issuer, anything that streamlines/simplifies requirements to be consistent across asset classes, will be favourably received.
This is an area to watch, offering potential opportunity to broaden the investor pool. The ACT will continue to work with the FCA and others to ensure that the opportunity is delivered.
Sarah Boyce is policy and technical director at the ACT