Rishi SunakIn a paper for the Centre for Policy Studies entitled ‘A New Era for Retail Bonds’ MP Rishi Sunak has made the case for a new exchange for retail bonds to improve access to credit for SMEs and encourage retail investors to embrace debt securities in the way that has been seen in the States and several markets across Europe.

Mr Sunak’s report identifies SMEs as the most powerful engine of prosperity in Britain generating more turnover than Brazil and employing five times as many people as Walmart and the NHS combined; however, he also identifies a problem in that whilst this country has a world-class track record of creating new businesses, when it comes to scaling them up it is less adroit.

In his eyes, perhaps the major problem for this failing is lack of access to funding because corporate credit markets are dominated by a few big banks that, since the financial crisis, have been far more reluctant to lend. Mr Sunak estimates the annual gap between what SMEs could, or might wish to borrow, and what they are actually getting, could be up to £35bn.

In Europe bank lending has dominated, with 80% of companies raising finance in this way which contrasts strongly with the US, where 25% of lending comes from the institutions; in the US companies are able to access a broader range of creditors via its capital markets ranging from pension funds to university endowments.

‘this country has a world-class track record of creating new businesses, when it comes to scaling them up it is less adroit’

Mr Sunak acknowledges the role that the LSE’s Order book for Retail Bonds (ORB) has played in funding companies, but believes it is simply too ‘expensive and complex’ for SMEs; because of the requirement to adhere to the stringent requirements of the UK Listing Authority (UKLA) he believes that ORB is geared towards large firms issuing bonds of £100m at a time.

Whilst recognising the dramatic growth of challenger banks and peer-to-peer lenders in response to this need for SME funding, Mr Sunak argues that there is a need for a new generation of retail bonds – sold by small businesses and bought by ordinary savers on a new Retail Bond Exchange.

He argues that the government should help foster a culture of investing in retail bonds thereby democratising saving and investment and increasing participation in the enterprise economy; he cites the fact that 55% of people in the US have some form of stockmarket investment compared to just 19% of Brits.

Mr Sunak believes that ORB’s issues are as a result of being aligned with the main market of the LSE and cites the precedent of AIM as an alternative to the main Stock Exchange; with light touch regulation and a more supportive environment, AIM has been a huge success, enabling hundreds of SMEs to raise relatively small amounts of equity.

There are also examples across Europe where debt securities issued on bond market equivalents of AIM are a staple in retail investment portfolios, and investors are much more attuned to financial self-reliance; hundreds of private companies have raised almost €2bn on Italy’s ExtraMOT exchange in average issues of just €8m.

‘an AIM-style UK market in bonds would be a boon to SMEs and savers would also gain a quality investment alternative’

It is argued that an AIM-style UK market in bonds would be a boon to SMEs and savers would also gain a quality investment alternative in an era of rock-bottom interest rates; as a higher ideal Mr Sunak believes that such a move could see many more people build a stake in the economy and be a powerful way to combat the perceived growing disillusionment with capitalism.

His suggestion is that the government should work with the London Stock Exchange and the Financial Conduct Authority to create the right regulatory framework; it should then stimulate demand by offering tax reliefs (as happened with AIM), allowing retail bonds from SMEs, as differentiated from mini bonds, to be included in ISAs, and could even issue government debt on the new market.

Taking it one step further, Mr Sunak proposes that the British Business Bank should package up smaller SME loans into a larger portfolio that can be securitised and be issued on the new exchange so that ordinary savers can enjoy the same opportunities as institutional investors.

He argues that a new exchange for tradeable retail bonds would help SMEs secure the investment they require to become the giants of tomorrow, could improve Britain’s productivity and give consumers a solid return and a stake in ‘Enterprise Britain’.

Those eyeing a win/win for enterprise and those investing for income may well raise a glass in anticipation.


See A New Era for Retail Bonds

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