Julian Knight: The sobering truth about the rush for retail bonds is enough to drive anyone to drink

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The Independent Online

Fancy owning your local pub? It's probably a secret desire of many Britons, particularly if it came with free drinks. And that's exactly what the people of Wrexham, a depressed north Wales town, are being offered through the Enterprise hub project sponsored by the Co-operative bank. Locals are being asked if they'd like shares in the Seven Stars pub at a cost of £100 a pop.

The Co-op says a well-run pub is an essential for every local community and at a time when thousands are closing around the country each year it's important to keep the Y Saith Seren (Seven Stars) in Wrexham going. I can't disagree with any of this, nor can I say if it's a sound investment or not. But it reflects a bigger trend in this post-financial crisis world where companies are appealing over the heads of traditional markets and lenders to the wider public. In this instance it may be a bit of fun to say you have a share in your local boozer but in many other instances the financials are much more serious.

I was chatting with a bond fund manager the other day who was warning about the plethora of so-called "retail bonds" where firms are tempting private investors to buy bonds (ie loan money in return for interest) to a big name company. What he was saying was these firms were often being turned down by the big institutions because there were concerns about their business and the chances of repayment, but they were then using their reputation to appeal directly to investors, using large financial advice networks and even direct advertising to bring in the punters.

The only problem is that the rate of return on these bonds is often much lower than should be the case for the risk involved – because a firm has a noteworthy brand it doesn't mean it is a well-run company or in a growth market.

He fears – and I share his concerns – that investors will be tempted by the name and the word "bond", which is the most misused word in financial services, suggesting safety of capital where often there is none.

In other major economies, particularly the US, the market in retail bonds is more developed and can offer some solid returns and transparency. Here, though, I don't think we are anywhere near that stage, which makes me feel frankly like having a stiff drink.

Who is benefitting?

Sitting here writing I can almost see the glint in Ed Balls' eyes – which he usually reserves for when the news for the economy and the Government is particularly bad – over the upcoming changes in child benefit.

The latest reforms, set to come in tomorrow, have the potential to be an over-complex horror show. Apart from dragging into self-assessment people who didn't have to do it before, the changes will confuse hundreds of thousands of parents.

What's more, HM Revenue & Customs seems to have deigned to inform only two-thirds of those parents likely to lose their child benefits as a result of means testing. Such confusion will cause anger – as with the disastrous launch of tax credits a decade ago. Personally, I thought the universality of child benefit was perverse, particularly with the state of our national finances, but to replace it with a system so complex is potentially politically damaging.

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