wealth inequality

A two-tiered debt capital bond market puts economic equality in the UK in peril

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The City has a real opportunity to level up financial infrastructures by democratising the debt capital bond market. (Photo by Chris J Ratcliffe/Getty Images)

The pledge to tackle economic inequality across the country is a central ambition of this government. What the financial industry can do in this process is a key question of our times. Finding an answer can help define the City’s legacy and the financial industry’s impact on broader society for generations to come.

The City is often seen as the enemy of levelling up ambitions or as a benefactor of wealth inequality. But our financial institutions have a vital role to play in promoting the idea of fairness and equal opportunities. One area where the City can bring its influence to bear is financial security in retirement. This has huge implications for societal cohesion.

There is still work to be done to improve financial equality, particularly within UK debt capital bond markets, where retail investors are still at a significant disadvantage from institutional investors.

This problem came into focus when the UK financial watchdog launched a campaign to discourage cash hoardings – with the intent to turn savers into investors. The regulator aims to target 8.6 million individuals who hold more than £10,000 of liquid assets in cash. It hopes to curtail this number by 20 per cent in 2025.

In the meantime, unfortunately, investors are being duped by unscrupulous firms offering incredibly risky unregulated investment vehicles. This issue was raised recently by Stacey Parsons of Winterflood Securities. He warned that unwitting households are being led down highly unregulated paths with their life savings, due to the lack of UK regulated transferable bonds in listed markets to accommodate all investor types.

Locking out consumers from regulated UK transferable debt markets, when investors are reaching for yield and returns, has had drastic unintended consequences, as highlighted by the London and Capital Finance (LCF) mini-bond scandal in 2019. Through great investment in advertising, LCF convinced many people to invest in its mini-bonds, which ultimately proved worthless. But that might have been only the tip of the iceberg. The list of unregulated mini-bond blow-ups continues to stack up.

Consumers are not the only ones paying the price. Indeed what’s happening is that the regulated world is 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.  

There is a solution. Demand from investors into unregulated mini-bonds could be alleviated, if the financial services industry supported the creation of a regulated and transferable UK bond market for consumers.

It’s not right that consumers can access riskier investments with the potential to cause financial ruin, but can’t invest in the UK-regulated bond market. 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.  

The City, in collaboration with government, industry bodies, issuers and brokers, has a chance to level up UK debt capital bond markets for UK consumers, by providing regulated access to corporate household named bonds. Key voices have advocated for better access to regulated transferable bonds, including those within Parliament. It’s time to make it happen.

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