- It says current FCA initiatives will have limited impact on corporate bond access
Plans to boost retail investors’ access to Britain’s corporate bond market risk falling flat under the City watchdog’s current approach, Barclays has warned.
The Financial Conduct Authority has been introducing a series of initiatives designed to make it more attractive for companies to issue bonds to everyday investors, giving firms access to another funding route and providing savers with a relatively low-risk and high yielding asset class.
FCA chief executive Nikhil Rathi said in May that ‘broader individual participation in our capital markets’ should ‘build stronger understanding of the importance of sensible risk-taking to grow our economy’.
The regulator is expected to publish a consultation in the first quarter of this year addressing some of the challenges, and potentially streamlining the issuance process and improving information accessibility for retail investors.
But research published by Barclays suggests the FCA’s current approach will not ‘have a significant impact on the availability of corporate bonds for UK retail investors’.
The bank’s analysis of all bonds in issue as of March 2022 found that just eight additional issuers would qualify for issuing bonds to UK retail investors under the watchdog’s planned changes.
Widening participation: The FCA is expected to publish a consultation addressing some of the challenges facing plans to open up access to Britain’s corporate bond market
It said: ‘A similar picture emerged from our insights into historic investor demand.
‘This showed that client requests to invest in specific corporate bonds between early 2023 and mid 2024 resulted in only six out of 50 of the previously rejected bonds, from three unique issuers being opened up for retail clients.’
More than half of bonds sold to professional investors between 2018 and mid 2024 also had ‘call’ features, according to Barclays, meaning ‘they would be more difficult for UK retail investors to access’.
Instead, the bank revealed four policy recommendations it thinks would have a greater impact.
Barclays said the FCA should create a formal definition of ‘vanilla corporate bonds’ and ‘clearly exempt them’ from rules covering retail disclosure.
The regulator should also replace the requirement for target market determination – whereby bond issuers have to specify what type of investor they are targeting – with issuer confirmation that vanilla corporate bonds are suitable for any investor type, it added.
New rules should require the consideration of issuing bonds in lower denominations, while firms should have to provide specific reasons for excluding retail investors when they choose to.
At present any bond issuance priced with a denomination of less than £100,000 is considered ‘retail’ and is therefore subject to substantially more disclosure requirements – meaning targeting individual investors is just not worth the time of some big issuers.
Barclays also said distributors of bonds should have an ‘on-going obligation’ to review their vanilla corporate bonds ‘taking into account any event that could materially affect investors over the duration of the bond’.
Barclays said: ‘We recommend that the regulatory framework needs to be reformed so that:
‘Significant barriers to including retail investors in corporate bonds issuances currently only accessible to wholesale investors are removed by reducing obligations upon issuers to the minimum necessary.
‘Nudges are introduced to encourage corporates to involve retail investors in issuance.
‘[And] responsibility for ensuring that customers are supported through the lifecycle of the bond is placed upon distributors, who have a direct relationship with retail investors.’
The Investor Access to Regulated Bonds (IARB) working group is an industry body working for a ‘future where corporate bonds are a readily accessible asset class, contributing to a more balanced and diversified investment landscape for all’.
Its chair Stacey Parsons welcomed Barclays’ findings, which she said ‘echo our concerns about the lack of access to corporate bonds for retail and wealth investors’.
Parsons added: ‘This report will help to shift the narrative in this market so that investors can invest in bonds to support a balanced portfolio and generate income.’
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