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

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The Financial Conduct Authority may 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 FCA says it is “monitoring the market” in non-pooled investments like CoCos, building society deferred shares and other novel securities due to concern they are inappropriate for retail investors.

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 – that were once exclusively offered to institutional investors, and which carry risks unfamiliar to and inappropriate for many ordinary retail investors.”

The market for these 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 offered by securities like CoCos have proved popular with investors in the low-rate environment.

The FCA may introduce an interim marketing restriction through a temporary product intervention rule while consulting on a permanent restriction.

Hargreaves Lansdown head of research Mark Dampier says: “Who promotes them? I wouldn’t have thought they had been promoted much –  they are not retail friendly products.”

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