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FCA considers banning retail promotion of CoCos and ‘novel securities’


The Financial Conduct Authority is planning to consult on whether to restrict the marketing of “novel securities” such as contingent convertibles to retail investors.

In its final guidance on the promotion of unregulated collective investment schemes, the watchdogs says it is “monitoring the market” in CoCos, building society deferred shares and other novel securities out of concern that they are inappropriate for the retail investor.

The FCA says: “The industry is beginning to introduce to the retail market a range of novel securities – including contingent convertibles, building society deferred shares and similar instruments – that were once exclusively offered to institutional investors, and which carry risks unfamiliar to and inappropriate for many ordinary retail investors.

“The FCA intends to consult on the introduction of a new marketing restriction in relation to these types of products.”

In recent years, the market for these new types of financial instruments has grown as banks and building societies seek new ways of raising loss-absorbing capital to meet enhanced prudential requirements. The relatively high interest rates that tend to be offered by securities such as CoCos has proved popular with investors in the current low-rate environment.

The FCA says: “We are concerned that these instruments could be promoted to retail consumers who do not have the necessary experience and understanding to evaluate them and who later face unexpected harm as a result.

“So a consumer could end up unknowingly buying the security for more than a professional investor would pay for it, there could be poor liquidity when the consumer tries to sell it on, particularly if the issuer should become prudentially stressed.”

The regulator adds that the risks to seem to be sufficient to warrant considering banning their promotion to retail investors and steering advice towards sophisticated and high-net-worth retail investors as well as professional investors.

It is also working with issuers to ensure novel securities are distributed in a way that stops ordinary retail investors from buying them while it consults on the matter.

The FCA says: “One option is to introduce an interim marketing restriction through a temporary product intervention rule to address the risks to consumers while we work on consulting on and introducing permanent rules.”

Sophisticated investors are defined by the FCA as retail clients with “extensive investment experience and knowledge of complex instruments, able to understand and evaluate the risks and potential rewards  of unusual, complex and/or illiquid investments”.

To be classed as high-net-worth, investors need to have an annual income of more than £100,000 or have investable net assets of more than £250,000. The FCA says it is reviewing the criteria for high-net-worth individuals and may update this in future.


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