Rishi Sunak will have been in office for just four weeks when he delivers his first Budget as Chancellor of the Exchequer. Promoted from chief secretary to the Treasury to Chancellor after Sajid Javid’s shock resignation, he has promised to go ahead with the government’s flagship economic policy speech on 11 March 2020, as planned.
Given his short tenure in No.11 Downing Street, it would be no surprise if Sunak referred to his past policy proposals for inspiration. After all, this is a man who has a long and interesting history in the financial sector – he started his career at Goldman Sachs, before moving into hedge fund management and then fintech investment.
But a 2017 paper may offer the most insight into Sunak’s vision for the economy.
In a report published by right-wing thinktank Centre for Policy Studies, Sunak laid out his plans for a small- and medium-sized enterprise (SME) bond market, funded by savers and subsidised by the government.
Titled ‘A New Era for Retail Bonds’, the paper argues that UK SMEs are too reliant on a few big banks for credit, while the SME debt capital markets are “underdeveloped.” As a result, there was a potential £35bn funding gap between the capital that SMEs could potentially raise, and the capital that was made available to them.
Of course, this is a gap that peer-to-peer lenders could fill – and since 2017, P2P platforms and other alternative finance providers have become much more popular. But Sunak has proposed another funding model.
His plan would see a new exchange launched for retail bonds, modelled on the FTSE’s AIM exchange. This retail bond exchange would be “flexibly regulated” by the Financial Conduct Authority and the London Stock Exchange and it would be open to all small businesses as a place where they could easily sell tradable bonds.
Read more: P2P regulation: A brave new world
Risk-averse investors could fund the exchange by buying and selling SME bonds, or by investing in index tracker funds. This would allow them to earn higher returns than a savings account, without the volatility and risk that is associated with the regular stock market.
Furthermore, the bonds would be eligible for ISA inclusion, offering investors tax relief.
Sunak added that the government may also issue some of its own debt as tradable bonds so that ordinary savers can have easy access to long-term treasury bond returns.
“Although alternative sources of debt finance, such as P2P networks like Funding Circle, are growing, they still account for a tiny fraction of the overall SME credit market,” Sunak wrote.
“Moreover, the bonds issued are generally not freely transferable or tradable, which inhibits the development of a proper market.”
It is worth remembering that this was written in 2017, and since then there have been some huge changes in the P2P and SME lending market.
The Innovative Finance ISA allows retail investors to access tax-free returns, while the rise of the secondary market means that P2P loans are more liquid and tradable than they have ever been before. And of course, the introduction of new regulations in December 2019 has added an extra layer of security to the P2P market.
In many ways, Sunak’s dream of an SME bond market has already come true – just not in the shape that he may have imagined.