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FCA restricts distribution of CoCos

Thursday 14th August 2014

The Financial Conduct Authority (FCA), in the first use of its new consumer protection powers, will limit firms from distributing contingent convertible securities (CoCos) to the mass retail market from 1 October 2014. 
CoCos, which are highly complex, are not believed to be appropriate for the mass retail market. As a result, the FCA has got involved to temporarily restrict their distribution to professional, institutional and sophisticated or high net worth retail investors. This is ahead of consulting on permanent rules later this year. 
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. As it currently stands, there is little experience and knowledge of how CoCos actually work in practice.
Whilst the UK market is at a stage of early development, it is expected that more firms will issue CoCos in the future. The FCA’s restriction will apply from 1 October 2014 to 1 October 2015. For the time being, the FCA will work closely with issuers to ensure that the sale of these instruments is properly targeted.
The recent announcement reiterates the FCA’s goal to secure appropriate protection for consumers. It also follows announcements by the the European Securities and Markets Authority and Joint Committee of European Supervisory Authorities showcasing the risks of CoCos and the responsibilities firms have when selling them.  
“In a low interest rate environment many investors might be tempted by CoCos offering high headline returns,” Christopher Woolard, the FCA’s director of policy, risk and research, said. “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.”

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