Winterflood: It is time to democratise debt markets

Despite this, debt markets remain strangely anchored in the past. While the retail investor has become resurgent in the equity markets, debt markets are generally still the preserve of the institutional investor.

If you consider the economic and market backdrop of the last 10 years, this becomes even more curious. In an environment of stubbornly low interest rates and rising prices, investors crave predictable returns – more synonymous with fixed income products than the traditionally more volatile equity, currency, or commodity markets. 

Compare this against the backdrop of ‘fixed rate’ products available to the UK investor. The average one-year fixed rate cash ISA pays just 0.38% interest, according to Moneyfacts, with the most up-to-date figures from the ONS showing that the value of UK cash ISAs stands at £316.2bn, representing over half of the value of ISA investment in the UK. 

Meanwhile, the lack of retail investor access to regulated premium grade corporate debt products since the introduction of regulatory changes, adopted under EU Prospectus and PRIIP regulation, has steered unwitting investors into unregulated investment products such as non-transferable mini-bonds. 

Locking out retail from regulated transferable debt markets, at time when investors are reaching for yield and returns, can have unintended, and sometimes catastrophic consequences for investors, as highlighted by the London and Capital Finance scandal in 2019.

Thousands of savers put their savings into high-risk mini-bond products following extensive advertising, particularly on social media. Around 11,500 bondholders put £237m into London Capital & Finance after being promised returns of 6.5% to 8%, only for the company to fall into administration.

What changed?

Regulatory changes, cheap financing and Covid recovery packages have created higher costs, increased complexities for issuers, forcing a legitimate reliance on distribution houses to deliver wholesale debt-only issuance, in effect cutting debt market access to the retail investor, or investors of under €100,000 –  ‘the wholesale threshold.’

Issuers and distributors are now embedded in the wholesale trend of issuance as an easier and cheaper way of raising debt, a trend that looks set to remain unless something fundamentally changes. 

To highlight this sea-change, in 2000, 90% of bonds brought to the European fixed income debt markets were listed with trading denominations of €/£1,000. Crucially, these low investment values made them accessible in secondary markets for retail investors and fund managers alike. Fast forward to 2018, and 90% of European fixed income debt markets in issuance are traded in denominations of €/£100,000, according to ICMA.

Analysis shows that investors without direct access to individual fixed income alternatives are leaving their hard-earned money in cash and losing out on investment returns that can help ensure a higher quality of life in retirement. Research from consultants LCP shows that savers taking advantage of pension freedoms to cash out before their retirement have lost £2bn in investment returns. 

Giving investors a choice

The FCA is seeking to implement the new consumer duty, setting higher expectations for firms and standards of care towards customers. As an industry, regulators, and government, we have a collective duty to ensure we equip consumers with the same balanced tools for investment as institutional investors enjoy, supporting their long-term savings and retirement plans.

UK investors and market participants have a culture of equity ownership, making it easier to buy, hold and invest in equities rather than to gain access to the biggest capital market in the world: fixed income. 

As we develop new frameworks in UK financial regulation post Brexit, we need to collectively recognise the need for change, to create flexible and dynamic ways for issuers and distributors to list debt products, with smaller denominations to enable retail investor access, while protecting the validity and purpose of the wholesale markets and consumer duty.

The Treasury’s UK Prospectus Regime Review consultation paper highlighted that the FCA and others have previously argued the wholesale threshold of €100,000 denomination potentially distorts debt capital markets and should be reviewed.

An inclusive debt market for the future 

No industry has been left untouched by the pandemic. For financial services, the crisis has had profound implications; the number and impact of retail investors have increased dramatically – changing the dynamics of the investment world.  

According to the ONS, the proportion of UK shares held by UK-resident individuals rose to 13.5%, up by 1.2 percentage points from 2016, moving further away from the historical low of 10.2% in 2008.This will no doubt have increased though innovation in trading platforms and the resulting surge in retail account openings since early 2020. Indeed, in 2020 The Financial Times estimated that 15% of the UK stock market was held by individual shareholders.

During periods of rising rates, bonds have shown predictability of returns, and act a shield against stock market volatility. Since 1976, bonds have provided consistent diversification during equity downturns – the top 10 worst quarters for stocks saw positive performance for bonds. They have clear portfolio benefits for the UK’s savers and investors.

The UK has a love affair with equities, it is now time to champion the retail investor once more by giving them easy and transparent access to regulated premium grade debt markets – unlocking the potential for the investor to access single stock debt markets in the same way they can single stock equity markets and create diversified streams of funding for premium grade regulated issuers.  

As HM Treasury appoint Mark Austin as an independent chair of the UK Secondary Capital Raising Review, focusing on reviewing the inclusion of retail investors into equity fundraising, we look forward to a similar focus on the balanced ownership of debt within the retail investor community. 

After all, if retail investors can readily invest directly in an increasingly wide range of niche and esoteric asset classes, then why not a 1.625% London Stock Exchange bond?

Now it is time to level the playing field for retail investors in debt markets. 

Stacey Parsons is head of fixed income Trading and Sales at Winterflood Securities 

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