FCA restricts CoCo sales to retail investors

The FCA has restricted the retail distribution of contingent convertible securities to professional, institutional and sophisticated investors.

Cocos are a type of convertible bond automatically converted when a certain contingent is reached – such as a specified share price being exceeded over a certain timeframe.

This restriction does not apply however to retail funds. 

The distribution restriction is the first use of new consumer protection powers by the FCA which believes CoCos are unlikely to be appropriate for the mass retail market.

The restriction will run from 1 October until 1 October 2015 and during this time the FCA will work with issuers to ensure the sale of CoCos is appropriately targeted.

The powers allow the FCA to temporarily restrict distribution of products for a maximum of 12 months.

The restriction comes ahead of a consultation on permanent rules later this year.

Due to their convertible nature from debt into equity, the FCA says this makes coupon payments “extremely difficult” for investors to assess.

The regulator adds there is little experience of how CoCos operate in practice at present.

FCA director of policy, risk and research Christopher Woolard says: “In a low interest rate environment many investors might be tempted by CoCos offering high headline returns.

“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.”