Let everyone in on retail corporate bonds
The government is finally moving in the right direction on retail corporate bonds. But its plan needs to improve accessibility so every investor can consider this critical lower risk asset type.
It is something that has been much talked about by government yet progress has been glacial despite widespread consensus for its need.
In December of 2011, Stephen Bartholomeusz wrote that if we were still just talking about the issue in twelve months (December 2012) it would represent a failure to create some insurance against the risk posed to our domestic system by the disturbing developments in off-shore debt markets (High time for corporate bond action, December 13, 2011).
We are still talking about it but it is pleasing to see the government finally release draft legislation designed to go some way towards making the buying and selling of retail corporate bonds an easier proposition.
This comes after I outlined in detail last November the actions a Coalition government would take to stimulate the development of a deep and liquid market. It followed extensive consultation with likely market participants and our approach was broadly endorsed.
This was perhaps the rocket Wayne Swan needed to replace words with a bit of action.
The development of a smarter and simpler regulatory framework is fundamental; so the trading of retail corporate bonds is comparable with other asset classes, particularly equities.
The proposals put forward by the government in regard to streamlining the disclosure regime for simple corporate bond offers; reform of civil liability provisions regarding corporate bonds issued to investors and the clarifying of defences related to misleading and deceptive statements and omissions in disclosure documents, are on the right track and reflect areas I outlined.
But the issue of accessibility is something I also strongly highlighted and is one area the government does not seem to fully grasp. Just as issuing retail corporate bonds should be easier, the purchase should be simpler, and much effort must be made to help educate the market because understandably there is a real knowledge gap among possible market participants.
National Australia Bank's Rick Sawers hit it on the head when he said if you arrived from outer space in the morning you could probably be buying shares online by 5pm, but buying a bond is a completely different story.
It makes no sense to have very simple access to one type of investment, an equity, yet have almost no access to lower risk corporate bonds. A transparent system in which the two types of asset can be compared and assessed side by side is needed.
For investors, creating a market that is easily accessible in the same way the share market is must be the goal. This would include access through online trading platforms that can be used on laptops, tablets and mobile phones.
This is important given the premium investors are now placing on more stable and reliable returns over longer periods as a result of the volatility they have witnessed and losses they have suffered in equities in the wake of the GFC.
This includes the ever expanding pool of self-managed superannuants, whose numbers have almost doubled since 2004 to more than 913,000 with investments exceeding $478 billion.
Simpler access to a domestic retail corporate bond market will support investment diversification for superannuants. At present about 50 per cent of our super investments are in shares; the highest in the world.
For issuers a well functioning local market should mean, particularly over time as scale develops, cheaper and easier to access funding. This should make this new source of domestic funds more competitive with offshore raising options, such as the USD (144a) market.
For banks this opportunity for diversification could assist Australian institutions seeking to comply with Basel III requirements that have direct implications for funding and liquidity and reduce reliance on international wholesale financial markets to fund economic growth.
And both banks and businesses could benefit from the space potentially freed up on bank balance sheets to support small and medium sized businesses by providing increased access to funds.
Developing a more efficient regulatory framework with adequate consumer safeguards is a role for government however the market must be allowed to naturally evolve; to set relative pricing, fees, tenor and volume. Only then will we be able to determine how it develops in the broader context of the Australian financial system.
The role of government must be to facilitate a stronger overall financial system, and then to let the system function without undue interference.
There will still be barriers, such as low participation, execution risk for issuers and onerous conditions, and at present there are advantages in issuing offshore.
And with a coupon at around 3 per cent government bonds can’t compete with government-backed bank term deposits at around 5 per cent.
But better regulation, not more regulation, can help remove barriers and create a competitive low-cost market that is a genuine and viable alternative to issuing overseas.
As the market develops additional issues that will require further consideration by government will doubtless emerge.
For example, the scope and merit of facilitating existing "seasoned” wholesale bonds being moved to the listed debt platform, so they can be traded by retail and wholesale investors interchangeably – similar to the approach being taken for Commonwealth Government Securities – should be considered.
This may be an efficient way of consolidating the market and, by allowing a large number of wholesale bonds to be available to retail investors, creating better price transparency, more liquidity and a good foundation for future primary issuance, rather than trying to build the market one new issue at a time.
The government’s draft legislation is merely the beginning, but at least the intent to develop the market remains on the agenda, which could be left for the Coalition to finish the job.
Andrew Robb is the shadow minister for Finance, Deregulation and Debt Reduction.