The FCAs plans to make it easier for companies to issue smaller bonds are a step in the right direction, but if the UK truly wants to unlock its corporate bond market for retail investors, more must be done, says Tim Focas
The Financial Conduct Authority’s (FCA) plans to cut red tape around the corporate bond market are a step in the right direction. By making life easier for companies to issue smaller bonds, the regulator is leaving the door at least slightly ajar for retail investors to access an asset class that has long been only open to the big financial institutions.
This is welcome news. The UK has lagged behind the US and even parts of Europe in democratising access to corporate bonds. As Barclays recently pointed out, US retail investors held a staggering $6.2 trillion in debt securities by the end of last year, while the UK’s retail bond market remains minuscule in comparison. The FCA’s reforms are designed to change this, but while their intentions are sound, the proposals do not go far enough. If the UK is serious about boosting its corporate bond market, additional measures are imperative.
Targeted tax incentives
One of the most effective ways to encourage both issuers and investors into the corporate bond market is through targeted tax incentives. Companies that issue bonds in smaller denominations, making them accessible to a wider investor base, should benefit from tax breaks. Much like the advantages offered under schemes such as ISAs or pensions. This would not only encourage more businesses to raise capital in this way but also make it financially viable for them to do so.
On the investor side, tax reliefs could be introduced for those who purchase smaller corporate bonds, again similar to ISAs. By making bond investments more tax-efficient, retail investors would have a stronger incentive to diversify into fixed income rather than relying purely on equities. This approach has been used to great success in the US, where municipal bonds enjoy tax benefits that enhance their attractiveness to individual investors.
While reducing regulatory barriers is important, it does not address one of the key disincentives for smaller bond issuances: sky-high costs. Eye-watering listing fees and administrative expenses make it much more expensive for companies to issue bonds in smaller chunks than simply raising capital through private placements with institutional investors. If the FCA truly wants to encourage companies to issue bonds that retail investors can access, it should work with the London Stock Exchange (LSE) to reduce listing fees for smaller issuances.
While reducing regulatory barriers is important, it does not address one of the key disincentives for smaller bond issuances: sky-high costs
Furthermore, streamlining regulatory approval processes even further would help companies cut down on administrative costs. The current system still favours large issuances because the insane amount paperwork makes smaller bond offerings disproportionately expensive. By simplifying slashing bureaucracy, the FCA can remove yet another hurdle preventing companies from tapping into the retail bond market.
But perhaps the biggest issue that the FCA’s current reforms fail to fully address is market liquidity. One of the biggest concerns for both issuers and investors is whether there will be a viable market for trading smaller bonds. If liquidity remains low, companies will be reluctant to issue them, and investors will shy away due to difficulties in buying and selling when they need to.
Market makers, vital firms that facilitate bond trading, must be incentivised to improve liquidity in the retail bond market. This could be achieved through or financial incentives that encourage these companies to actively participate in making markets for smaller bonds. Additionally, large institutional investors could act as ‘anchor buyers’ to provide initial liquidity and give companies confidence that their smaller bond issuances will be successful. Without such support, the market risks becoming a ghost town where bonds are technically available but practically untradeable.
If the UK truly wants to unlock its corporate bond market for retail investors, more must be done. Tax incentives for both issuers and investors, lower issuance costs and improved liquidity support are essential components of a thriving retail bond market. Without these additional measures, the FCA’s reforms risk representing little more than a tease than to market that remains largely inaccessible to the very investors it aims to attract. Rule makers have a golden opportunity to reshape the country’s fixed-income market, making it as accessible as those in the US. The FCA has taken the first step, but now it’s time to go further, bolder, and ensure that the UK becomes a true leader in retail bond investment.
Tim Focas is head of capital markets at Aspectus