Contingent convertible instruments (commonly known as CoCos) are hybrid capital securities that absorb losses when the capital of the issuer falls below a certain level. They are risky and highly complex instruments and so we have now made temporary product intervention rules, which will come into effect on 1 October 2014 and lapse on 1 October 2015. These rules impose restrictions in relation to the distribution of CoCos to retail investors.
This communication explains the scope of the temporary rules and exemptions available, as well as providing our rationale for making temporary rules.
This version of the temporary product intervention rule announcement, introducing restrictions in relation to the retail distribution of contingent convertible instruments, replaces the one published on 5 August 2014. In its original version, paragraph 70 described only one possible type of CoCo which mutual societies could issue. This was unintended and incorrectly suggested that any mutual society CoCo would be a write-down security. The amendment clarifies the position.
What is the background to this?
We regard CoCos as posing particular risks of inappropriate distribution to ordinary retail customers (i.e. retail clients who are neither sophisticated nor high net worth or who do not meet any of the other permitted criteria). The restrictions will limit the ability of firms to distribute CoCos to retail customers: the firm will first be required to check that the customer falls within one of the permitted categories.
Who is this aimed at?
The temporary rules apply to all authorised persons in the UK, including both issuers of CoCos and firms promoting or intermediating transactions in CoCos.
The rules have no effect in relation to the distribution of CoCos to professional or institutional clients, or to exempt persons. The rules do not restrict the distribution of prospectuses issued in compliance with the Prospectus Directive, and do not apply to clearing, registration, settlement, custodial or back office processing services.
What are the next steps?
In September this year, we are planning to publish a consultation paper about proposed permanent rules on CoCos. Following consideration of feedback, we aim to publish a policy statement in Q2 2015, with final rules to be scheduled to take effect on 1 October 2015, when the temporary product intervention rules expire.
Temporary product intervention rules are made without prior consultation and thus will not undergo the usual process for testing draft rules and receiving feedback from the public before they are made. While every effort has been made to ensure these temporary rules have the effect described in this communication, we remain aware of the possibility of unintended consequences.
As such, we would welcome comments from any firms, organisations or members of the public who believe they have identified ways in which the drafting of the temporary rules may depart from their intended effect. We particularly welcome comments before the rules come into force on 1 October 2014.
Want to find out more?
For more information see:
- Press release: FCA restricts distribution of CoCos to retail investors
- European Securities and Markets Authority (ESMA) statement on the potential risks associated with investment in CoCos
- Joint Committee of the European Supervisory Authorities reminder of applicable regulatory responsibilities with regard to placement of financial instruments with depositors, retail investors and policy holders ('Self placement')