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Democratising the UK bond market can help level up investment choice and protect consumers

Photo of Tom Capon, Chair of City Future.

By Tom Capon, Francia Acosta-Saltos and Saadi Chowdhury, City Future 

The pledge to “level up and unite the country” has been a central ambition of the current UK government since it came to power in 2019. The financial industry’s role in this process is a key question of our times. It can help define the City’s legacy and the financial industry’s impact on broader society for generations to come.

At the heart of the issue of what role the City can play in levelling up the UK we find not only the very idea of fairness, but also equal opportunities of financial outcomes.

The financial industry has made great regulated strides in the last decade in levelling up, engineering new and innovative financial instruments to consumers, bringing investment to all, by ensuring investors of all types can build healthy retirement pots for the future.

Meanwhile, through ethical and impact investing, the financial services industry is demonstrating how when private sector companies and investors come together, they can move the dial on humanity’s greatest challenges, such as climate change. And financial security in retirement, which has huge implications for societal cohesion, is a major part of the ‘social’ in ESG in which so many corporate companies aspire to make an impact.

But, unfortunately, within the financial services industry, there is still work to be done in some areas of financial wellbeing, particularly within UK debt capital bond markets.

This problem comes into sharper focus when we consider the UK financial watchdog is launching a campaign to discourage cash hoardings – with the express intent to turn savers into investors. The regulator is targeting 8.6 million individuals who hold more than £10,000 of liquid assets in cash and aim to curtail this number by 20 per cent in 2025. It is, firstly, vital that these consumers have access to an appropriate range of products to do this.

Unfortunately, investors are at the same time being duped by unscrupulous firms offering incredibly risky unregulated investment vehicles. This issue was raised recently by Stacey Parsons of Winterflood Securities, who warned, at the City Future levelling up event, that unwitting households are being led down highly unregulated paths with their life savings, due to the lack of UK regulated transferable bonds in the listed markets to accommodate all investor types.

Locking out consumers from regulated UK transferable debt markets, at a time when investors are searching for yield and returns, can have unintended consequences for investors, as highlighted by the London and Capital Finance mini bond scandal in 2019.

Unfortunately, London Capital and Finance would seem to be the tip of the iceberg. The list of unregulated mini bonds continues to stack up.

But it isn’t just consumers that are paying the price, the regulated world is also paying for the sins of the unregulated world. The London and Capital Finance mini-bond scandal was behind the significant increase in the FSCS levy on firms in 2020/21, with the Levy bill standing at £649m for the year. As the levy forecast moves to £900m for 22/23, with £400m attributed to compensation for failures, this isn’t an issue that’s going away.

Demand from investors into unregulated mini bonds and other such income scandals would and could be alleviated, if the financial services industry were to support the creation of a standardised, regulated and transferable UK bond market for consumers.

We must ask the question: Is it right that consumers are deterred into riskier investments which have the potential to cause financial ruin, but yet cannot invest in the UK regulated bond market, an arena of investment that houses bonds issued by some of the most credible and UK-centric household names in the market?

This would seem to go against the grain of the idea of levelling-up, but also the very spirit of the Retail Distribution Review which sought to forge a level-playing field within financial services.

In the UK, a two-tier system in debt capital bond markets has been allowed to develop over the last 10 years, where ordinary consumers in search of dependable income have been left high and dry. This parlous situation is made worse by a backdrop of low rates and rising inflation, where investors are forced to reach for income.

With great power comes great responsibility. The City, in collaboration, with government, industry bodies, issuers and brokers, have a chance to level-up UK debt capital bond markets for UK consumers, by providing regulated access to corporate household named bonds, something we are seeing the EU support with their Capital Market Union plan.

The good news is that support is growing for the democratisation of debt capital bond markets in the UK. Several key voices have advocated for better access to regulated transferable bonds, including those within Parliament.

What is desperately needed, is a readjustment to outdated market practices which can be done by fairly obvious changes to existing regulations, thus supporting UK corporate entities to diversify their funding requirement to accommodate UK consumers. This will give UK consumers better regulated choices in UK bond markets. It’s time to level up UK debt capital bond markets.

City Future is a think-tank which aims to increase understanding of the City by creating effective policy, encouraging enterprise, and promoting social responsibility in business.

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