The Financial Conduct Authority has taken advantage of new powers to ban the sale of contingent convertible securities to the general public.
The ban, which will be enforced for a year from 1 October 2014, is the first under new EU-mandated consumer protection powers, and will be applied ahead of a broader review of the sector.
‘In the interim the FCA will continue to work with issuers to ensure that the sale of these instruments is appropriately targeted,’ said the regulator.
CoCos, fixed income securities which can be written off or converted to equity by the issuer, have been an increasingly popular form of funding in recent years, particularly by the banking sector.
Professional, institutional and sophisticated or high net worth investors will be unaffected by the decision.
‘In a low interest rate environment many investors might be tempted by CoCos offering high headline returns,’ said FCA director of policy, risk and research Christopher Woolard.
‘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.’
Portuguese bank Banco Espirito Santo was on the verge of issuing its first CoCos when it ran into financial difficulties last month, and had to cancel the planned sale.
Junior bond holders in the business were near wiped-out in the subsequent government bailout. The FCA said that it regarded CoCos as posing ‘particular risks of inappropriate distribution’ to retail investors.