In the first use of new consumer protection powers, the Financial Conduct Authority (FCA) will restrict firms from distributing contingent convertible securities (CoCos) to the mass retail market from 1 October 2014.
CoCos are highly complex and the FCA believes they are unlikely to be appropriate for the mass retail market, so has stepped in to temporarily restrict their distribution only to professional, institutional and sophisticated or high net worth retail investors ahead of consulting on permanent rules later this year.
Christopher Woolard, FCA director of policy, risk and research said:
“In a low interest rate environment many investors might be tempted by CoCos offering high headline returns. However, they are complex and can be highly risky, and the FCA has used its new powers to ensure that CoCos are not inappropriately made available to the mass retail market while still allowing access for experienced investors.”
CoCos can be written off (in part or entirely) or converted into equity when the issuer’s capital position falls, while issuers can have unusually broad discretion in relation to coupon payments making it extremely difficult for investors to assess, understand and price CoCos. At present there is little experience of how CoCos operate in practice.
Although the UK market is at an early stage of development, we expect to see more firms issue CoCos in future. The restriction announced today will apply from 1 October 2014 to 1 October 2015. In the interim the FCA will continue to work with issuers to ensure that the sale of these instruments is appropriately targeted.
Today’s announcement reflects the FCA’s objective to secure appropriate protection for consumers and follows announcements by the the European Securities and Markets Authority and Joint Committee of European Supervisory Authorities highlighting the risks of CoCos and firms responsibilities when selling them.
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