European corporate bonds should be sold on a single market to both wholesale and retail investors, for whom advice should be made mandatory.
The Wealth Management Association’s response to a review of European rules on the prospectus that must be provided for bond issues has proposed several changes designed to lift the corporate bond market.
At present, for issues into the retail market under the directive a heavy prospectus is needed. In addition, any bond sized with an issue size of less than €100,000 (£72,000) needs the retail prospectus, even if it is for a wholesale market.
The WMA has proposed that this denomination limit should be abolished and that there should be a single retail and wholesale market for plain vanilla corporate bonds in the EU, in the same way as there is a single equity market.
The association stated that consideration should be given to whether retail investor access to this market should only be under the condition of receiving professional advice or discretionary management, to ensure full investor protection.
“Our proposal will end this bias against the retail investor in corporate bond issues and free up the flow of retail capital into this vital investment category. Bond funds are not bonds and are not a solution,” stated the WMA’s response.
Speaking to FTAdviser, chief executive Liz Field said that the overall effect of the current regulations have “all but killed off the retail market in corporate bonds”.
She commented that the retail prospectus is not well liked by insurers and asset managers because its big, expensive and often not read, which actually means that bond issues in the UK by corporations are overwhelmingly in denominations over €100,000.
“That’s far too big and unsuitable for most retail investors, apart from wealthy clients, because its too high a proportion of a person’s income that’s tied up and also it’s too inflexible. It’s very difficult to sell that back onto the retail market because the size is too big.”
Ms Field stated that the WMA’s suggestions would help to resurrect the market.
“We’ve got beneficial effects for the long-term savings, returns against equity volatility, portfolio diversification, which then leads to the jobs, and growth agenda which links into the Capital Markets Union.
With regard to the Capital Markets Union, she added that the WMA has made some suggestions as to where the new organisation, if it comes into being, will support the jobs and growth agenda. One of these was for a pan-EU equity based retail produc, based on the UK stocks and shares Isa.
“It could form an alternative to Ucits and would be underpinned by an existing EU infrastructure, so that already assures proper listing prospectus, dealing and reporting arrangements for equity across the continent.”