Friday, 20 July 2018

UK looks to open debt markets up for retail investors

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Britain is looking at ways to get more retail investors participating in debt issues and is also considering setting up a UK primary debt multilateral trading facility as part of a review of primary markets.

The review, launched by the Financial Conduct Authority on Tuesday, is aimed at making primary markets better at meeting the needs of issuers and investors.

It will also assess the effectiveness of equity markets in providing capital for growth companies, especially technology and science firms.

The FCA said a number of market participants have called for reforms to enable retail investors to more easily access straightforward debt instruments issued by established corporates.

“These stakeholders suggest that our existing approach constitutes a form of over-regulation which has the effect of excluding retail investors from participation in the highest quality debt issuance, leaving fewer options for those retail investors wishing to allocate capital to high-quality corporate debt,” the discussion paper said.

Under existing rules, if firms believe they have to provide more disclosure to sell bonds to retail investors it could disincentivise corporate issuers to bother, as they can usually sell the bonds quickly and easily to institutional investors with a simple term sheet.

At the other end of the scale, the FCA said it would also consider whether London needs a multilateral trading facility, or MTF.

Britain has no market equivalent to the Irish GEM market or Luxembourg’s EuroMTF, which are specialist MTFs focused on institutional investors that have achieved considerable success.

The MTFs focus on wholesale bonds that are only marketed to institutional investors, and have been a significant development in European primary debt markets.

The FCA said it could be at attractive option for large, emerging market issuers without an equity listing in the EU.

In the last year, for example, there has been a lot of interest in rupee-dominated bonds issued to international investors in markets outside India. Chinese state-owned banks have also accessed EU debt markets. Britain also has a “relatively limited” share of international high-yield bond markets, which could be addressed, the FCA said.


The regulator said it also wanted to address concerns UK primary equity markets are not performing their central role to raise capital for growth and development, especially for science and tech companies.

“Much recent commentary has focused on challenges faced by companies as they seek to transform from small start-ups to large, established businesses,” the FCA said.

These ‘scale-up’ companies are commonly defined as having an average growth in employees or turnover of more than 20% per annum over three years, with a minimum of 20 staff at the start.

“If there is perceived to be a shortage of capital for scale-up companies, we would be keen to explore if enhancements to the primary market regulatory regime could help address the problem,” the FCA said.

It said it needed to balance the need for scale-up firms to raise capital against the resulting risks for investors.

“Some stakeholders were vocal that very early-stage companies represent a binary investment outcome: either a high return or a total loss of investment,” it noted, saying many were better off remaining private during that stage.

The discussion forms part of the FCA’s pledge this year to achieve “an increase in the efficiency and effectiveness of primary markets”.


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