Financial Conduct Authority consults on restrictions on the retail distribution of regulatory capital instruments

Published: 29/10/2014     Last Modified: 29/10/2014

The Financial Conduct Authority (FCA) is proposing to place new requirements that would apply when mutual society shares are sold to ordinary retail investors. The FCA is also consulting on plans to make permanent the temporary rules, announced in August 2014, which placed restrictions on the distribution of contingent convertible securities (CoCos).  

Christopher Woolard, director of policy, risk and research at the FCA, said:

“One of our objectives is to ensure that consumers have the right degree of protection. That is why the new rules we are proposing will make sure that there are appropriate safeguards in place so these complex instruments are offered only to investors who are able to make informed decisions about them.”

The consultation on the proposed new rules will be open until 29 January 2015.

Distribution restrictions for mutual society share capital instruments

Mutual societies are able to issue new types of share instruments to strengthen their capital base. This is important because mutual societies often have limited sources to raise capital. However, while features between issues vary, these instruments can carry risks which many consumers may be unfamiliar with.

The key risk factors include a lack of liquidity, which means that investors may not be able to sell when they want to or find that they can only sell them at reduced values. In addition, the dividend is not guaranteed by the mutual society and there is the risk of partial or complete loss of capital if the issuer gets into financial difficulty.

The FCA is proposing that firms selling these investments will need to ensure the investor has read specified risk warnings and committed not to invest more than 5% of their net assets. These requirements apply only to sales to retail investors who have not been certified as sophisticated or high net worth.

CoCos

In August, the FCA announced temporary rules imposing a restriction on the retail distribution of CoCos. These rules came into force on 1 October 2014 and will expire on 1 October 2015. The FCA is now consulting on proposed permanent rules, which are broadly the same as the temporary rules, but would also impose restrictions on funds of CoCos.

CoCos are risky, highly complex financial instruments. The FCA believes they are unlikely to be appropriate for ordinary retail investors, so has stepped in to restrict their retail distribution to investors who are sophisticated or high net worth. Distribution to professional and institutional investors remains unrestricted.

Notes to editors

  1. Consultation paper: Restrictions on the retail distribution of regulatory capital instruments.
  2. Press release: FCA restricts distribution of CoCos to retail investors (5 August 2014).
  3. Press release: FCA to ban the promotion of UCIS and certain close substitutes to ordinary retail investors (4 June 2013).
  4. On the 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
  5. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
  6. Find out more information about the FCA.

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