Commentary

23rd Jan

Government Protection for Retail Bond Investors?

There is increasing pressure from the industry to ensure that retail bonds are included in the FSA-controlled Financial Services Compensation Scheme(FSCS).    

The Lead Manager behind a number of high-profile retail bond issues in 2012, Numis Securities, wants the FSCS – which guarantees up to £85,000 of personal savings with a bank or building society – to extend the sphere of its protection to include an individual’s investment in retail bonds.    

The UK market for retail bonds, which enables individual investors to buy debt directly from a company at a comparatively attractive annual rate of return, has grown quickly since the establishment of the LSE’s Order Book for Retail Bonds in 2010.     

Oliver Cardigan, a director at Numis Securities, said his company was in negotiation with the government in the hope of extending consumer protection to retail bonds.    

Demystifying the Product   

There is increasing complexity in the structure of bonds that are being offered in the retail market, with purchasers advised to look at the relative merits of rated vs not-rated issues, secured vs unsecured and to understand exactly where the bonds sit in the debt structure of the issuing entity.    

Under current rules an entire investment is at risk if a company is liquidated, and including retail bonds in the compensation scheme is likely to demystify the product and push up demand from individual investors.

Cardigan believes that the majority of retail bond issues are taken up by discretionary fund managers rather than self-directed investors and that despite that advertisements that are becoming common-place in the Sundays, nervousness from the FSA regarding the use of compliant language is hampering the use of marketing channels such as the TV and social media.    

Henrietta Podd, Head of Debt Advice at Canaccord Genuity reports that there were sixteen retail bond issues in 2012, raising a total of £1.5bn – a 78% year-on-year increase – with an average individual investment  of around £20,000. In lieu of this protection, Numis is preparing to unveil details of the first retail bond issue of 2013 ­– involving FTSE 250 oil and gas explorer EnQuest.

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