High net worth or sophisticated investors are among the few still able to be sold contingent convertible securities (CoCos) after the UK regulator acted to restrict their sale.
From 1 October 2014 these products will be banned from the mass retail market, the Financial Conduct Authority has ruled, in what is the first case of it using new consumer protection powers.
The temporary move will also allow institutional and professional investors to use CoCos. The restriction lasts for one year until 1 October 2015. There will be a consultation on permanent rules late in the year.
The FCA said that the UK market for CoCos is in its early stages, but that it expects more firms to issue these investment products in the future.
“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,” the FCA said in a statement.
Whilst the restriction is in place the regulator said it will work with issuers to ensure the sale of these instruments is correctly targeted.
The move follows announcements from the European Securities and Markets Authority and Joint Committee of European Supervisory Authorities highlighting the risks of CoCos and firms responsibilities when selling them.