FCA restricts retail sale of complex securities

Out-Law News | 07 Aug 2014 | 12:55 pm | 1 min. read

Firms will be prevented from selling complex contingent convertible securities (CoCos) to ordinary retail investors from October, the Financial Conduct Authority (FCA) has announced, in the first use of its temporary product intervention powers.

As part of its statutory consumer protection and competition objectives, the FCA was given the power to make temporary rules without first consulting on them in some circumstances. Its restrictions on CoCos will come into effect on 1 October 2014 alongside a planned consultation on permanent rules, and can last for a maximum of 12 months.

A CoCo is a type of hybrid capital security that can be converted to shares or written off entirely if the capital of the issuer, usually a bank, falls below a certain level. The FCA's intervention in their sale comes shortly after announcements by the European Securities and Markets Authority (ESMA) and Joint Committee of European Supervisory Authorities highlighting the rights of CoCos and the responsibilities firms have when selling them.

Christopher Woolard, the FCA's director of policy, risk and research, said that less sophisticated investors might not realise that the relatively high returns from CoCos reflected the risks and complexities of the product.

"In a low interest rate environment many investors might be tempted by CoCos offering high headline returns," he 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."

The new restriction will not prevent the sale of CoCos to professional or institutional investors, or to sophisticated or wealthy investors, the FCA said. However, firms will be required to check that the prospective customer falls within one of these permitted categories before they can make the sale.

The FCA intends to publish its proposals for permanent rules on the sale of CoCos for consultation in September, according to the announcement. Although it will not be formally consulting on its temporary rules, it said that it would "welcome comments" from firms, organisations or members of the public who believe that the rules as drafted may "depart from their intended effect".

Editor's note 16/06/2015: The headline was changed. It previously said that this was the FCA's first use of its consumer protection powers, which was not correct.