Often Pimfa finds itself almost making contradictory arguments when dealing with both policymakers and the regulator.
While we have been extremely critical both of the regulatory approach that contributed to the collapse of London Capital & Finance and the prevalence of high-risk investments targeted at ordinary mass affluent consumers more broadly, that does not necessarily mean we are opposed to the existence of retail bonds per se.
Mass affluent investors are plainly unsuited to this type of investment, which is why we have welcomed the government’s decision to bring retail bonds within the regulatory perimeter, as well as ongoing work to strengthen the financial promotions regime, which we strongly advocated for and believe is important.
However, it is also the case that for those who are demonstrably high-net-worth or sophisticated investors, more illiquid, high-risk investments such as retail bonds can be suitable building blocks in a well-diversified portfolio.
It is for this reason that we have also recently welcomed moves to allow companies to offer securities under the previous threshold in an effort to raise capital and build their businesses.
One of the key priorities going forward for government will be how to build a sustained economic recovery from the coronavirus pandemic.
That recovery will need to be built on pursuing a growth-based strategy, which will require significant investment in the UK’s legion of small to medium-sized enterprises that are searching for scale-up capital to invest in growing their businesses.
For Pimfa, that means more than simply providing tax relief through schemes such as the Enterprise Investment Scheme to HNW individuals who invest in scale-up businesses through Aim-listed equities.
The overwhelming majority of British businesses are SMEs. These businesses generate a significant amount of money for the UK economy and contribute more than 50 per cent of private sector jobs within the UK.
And yet, these businesses continue to be let down by a financial services system that does not provide them with access to capital, which is a significant barrier to growth for them.
This is ultimately an issue of supply. The UK corporate banking market is reasonably small and the vast majority of loans are provided by a tiny handful of the largest players in the market. While alternative sources of finance are available this still represents a small amount of funding.
One way to increase the supply of capital for SMEs would be to allow Aim-listed companies to issue debt in the form of retail bonds to HNW sophisticated investors.
They are a good way for scale-up businesses to raise much needed additional capital to fuel growth, and for investors that understand the risks involved – investing in Aim stocks would suggest a higher appetite for risk already – they would work well to diversify portfolios and would be less volatile than simply investing in Aim-listed equities.